REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 589 OF 2010
Tin Plate Dealers Association Pvt. Ltd. & Ors. ...Appellant (s)
Versus
Satish Chandra Sanwalka & Ors. ...Respondent (s)
With
CIVIL APPEAL NO.599 OF 2010
J U D G M E N T
RANJAN GOGOI, J.
Both the appeals being against the common judgment and order of the High
Court of Calcutta dated 14th September, 2005 were heard together and are
being dealt with by this common order.
The appellant in Civil Appeal No. 589 of 2010 is a private limited company
incorporated in the year 1948 with its registered office at Calcutta. The
appellants 2 to 5 (hereinafter referred to as the ‘Gupta Group’) had come
into control of the company by actions and omissions complained of by
respondents 1 to 7 in the said appeal i.e. C.A. No.589 of 2010 which had
led to the institution of the company petition under Section 397/398 of the
Companies Act, 1956 (hereinafter referred to as the ‘Act’). The said
respondents may be conveniently referred to as the “Sanwalka Group”.
At the time of its incorporation, the authorised capital of the company was
Rs. 10 lakh consisting of 4,000 redeemable cumulative preference shares of
Rs. 100/- each and 6,000 ordinary shares of Rs. 100/- each. The paid-up
capital of the company before the issue of new, ordinary and bonus shares,
which is the bone of contention between the parties, consisted of 4132
partly paid ordinary shares and 1868 fully paid ordinary shares besides
3065 fully paid preference shares. One M/s. Gupta Brothers originally held
the 4132 partly paid shares. The said shares were forfeited sometime in
the year 1966 and thereafter the same were issued to the Sanwalka Group who
paid a total of Rs.45 for each share consisting of payment at the time of
application and allotment and Rs.10/- per share on a call being made
subsequently. Whereas, according to Gupta Group, these shares were held by
the Sanwalka Group on behalf of Gupta Brothers, the said fact is denied by
the Sanwalka Group. According to the Sanwalka Group, the Gupta Group
without notice to them had increased the authorized capital of the company
to Rs. 5 crores in an Extra Ordinary General Meeting of the Company held on
5.7.1994. No notice of the said meeting was given to the Sanwalka Goup. A
Board Meeting was held on the same day i.e. 5.7.1994 to give effect to the
above decision taken in the E.O.G.M. to increase the share capital of the
company. In the said Board meeting, a follow up decision was taken to allot
bonus shares at the ratio of 60 bonus shares for every fully paid up
preference and equity share held. The said bonus shares were to be issued
against revaluation of the industrial plot in Okhla Industrial Area, New
Delhi which was the only asset of the company at that time. This was not
contemplated by the Articles of Association of the Company, according to
the Sanwalka Group. In any case, no bonus shares were allotted to them.
Further more, according to the Sanwalka Group, pursuant to the decision
taken on 5.7.1994, in August, 1995 the company issued 3065 equity shares to
the holders of the preference shares (Gupta Group). In February, 1996,
25,000 ordinary equity shares were again issued to the members of the Gupta
Group against which Rs.40 per share was paid. The said issue was ostensibly
to raise additional capital for the company. This allotment was, however,
to the exclusion of the Sanwalka Group. Contending that the aforesaid acts
had the effect of reducing the Sanwalka Group, which was otherwise in the
majority, to a negligible minority in the company, the company petition
alleging oppression was filed before the Company Law Board wherein the act
of removing two members of the Sanwalka Group from the Board of Directors
(w.e.f.1.7.1991) and inducting two others of the Gupta Group in their place
was also called into question.
From the reply filed by the Gupta Group to the company petition it
transpired that the 4132 partly paid shares held by the Sanwalka Group
stood forfeited. The aforesaid forfeiture was therefore challenged in the
company petition with a claim that the said shares be restored to the
members of the Sanwalka group. During the subsistence of the company
petition, supplementary applications were also filed challenging the action
of the Gupta Group in leasing out the industrial plot to sister concerns on
terms claimed to be prejudicial to the interest of the company and of the
shareholders.
The eventual reliefs prayed for in the Company Petition in the light of
the averments made in the said petition and the supplementary applications
were for:
restoration of the names of the members of the Sanwalka Group in the
register of members of the company;
cancellation of the allotment of bonus shares;
cancellation of the issue and allotment of 25000 partly paid up ordinary
equity shares to the Gupta Group;
cancellation of 3065 equity shares to the holders of the 3065 preference
shares;
cancellation of the lease agreement in respect of the industrial plot and
restoration of the names of the concerned members of the Sanwalka Group as
Directors of the Company.
6. The Company Petition was opposed by Gupta Group as not maintainable
in law. According to the Gupta Group, the shares held by the members of the
Sanwalka Group stood forfeited and the holders thereof had ceased to be
members of the company. Such forfeiture, according to the Gupta Group, was
in the following circumstances.
The said shares were held by the Sanwalka Group as beneficiaries on behalf
of the original holders i.e. M/s. Gupta Brothers. As the shares held by the
Gupta Brothers were partly paid, the Sanwalka Group as beneficiary holders,
was liable to pay the unpaid value of the said shares along with interest
therein on a call being made by the company. Such a call, according to the
Gupta Group, was made on 05.01.1991 which went unanswered. Consequently,
the aforesaid shares were forfeited. There was an alternative contention
advanced by Gupta Group to the effect that in any event the Sanwalka Group
were holders of partly paid shares and they having not responded to the
call notice dated 5.1.1991, the company petition was not maintainable under
Section 399 of the Act.
7. The claim of the Sanwalka Group that the issue of bonus shares was
not authorized as the same could not have been issued again the revaluation
reserve was resisted by the Gupta Group by specific reference to the
relevant provisions of the Companies Act, details of which will be noticed
later. It was claimed that in the Board Meeting dated 5.7.1994
proportionate allotment of bonus shares against the 4132 partly paid shares
in which the Sanwalka Group held a beneficial interest was offered subject
to payment of the dues against the said shares in term of the call notice
dated 5.1.1991. Insofar as the issue of 25,000 ordinary shares is
concerned, it was contended by the Gupta Group that the said shares were
issued to infuse badly needed capital into the company. In view of the
clear and expressed disinterest of the Sanwalka Group in the affairs of the
company evidenced by their long silence and failure to respond to the call
notice dated 5.1.1991 and also to participate in the Board meetings, it was
understood by the Gupta Group that they would not be interested in
allotment of any part of the newly issued share capital i.e. 25,000 shares.
In any case, according to the Gupta Group, as the members of the Sanwalka
Group had ceased to be members of the company (1995) by the time the 25,000
shares were issued/allotted (February, 1996) they were not entitled to
allotment of any of the said newly issued shares.
8. Insofar as the lease in respect of the industrial plot is concerned,
it was urged on behalf of Gupta Group that the same was done in
consideration of the funds made available by the lessees to raise
construction on the land which was necessary to pre-empt an imminent
forfeiture of the lease itself. The actions of the company, therefore, were
claimed to be in the interest of the company.
9. The Company Law Board (CLB) by an elaborate order dated 1.3.2001
overruled the objections raised by the Gupta Group to the maintainability
of the petition. The CLB concluded that the shares held by the members of
the Sanwalka Group were in their own right, independent of any right of
M/s. Gupta Brothers all of which stood extinguished upon forfeiture of the
shares held by the said Gupta Brothers. The CLB further held that under
Article 18 of the Articles of Association of the Company, it is M/s. Gupta
Brothers who were liable to pay the dues, if any, on the said forfeited
shares. The Board also found that the members of the Sanwalka Group had
paid Rs.45 per share and though there were an obligation to pay the balance
on a call being made the materials on record did not disclose that any such
call was made at any point of time. In this regard the notice dated
5.1.1991 was held by the CLB not to be duly proved to have been issued
following the procedure under Section 53 of the Act. It was also held that
the said notice dated 5.1.1991 did not contemplate forfeiture of the shares
in the event of failure to pay the call money as required under Clause 14
of the Articles of Association of the Company. On the basis of the said
findings the twin objections raised by the Gupta Group to the
maintainability of the company petition was held against them.
10. The CLB by its order dated 01.03.2001 further held that the issue of
bonus shares against revaluation reserve was contrary to the provisions of
Article 96 of Table A of the Act of 1956. So far as the issue of 25,000
ordinary equity shares is concerned, the CLB decided the issue in favour of
the Gupta Group. However, as the members of the Sanwalka Group continued to
be members of the company, it was held that proportionate allotment of the
said equity shares should have been made to them also. The removal of the
two representatives of the Sanwalka Group from the Board was also held to
be bad on the aforesaid count. Of particular significance would be the
finding of the Board that notice of the EOGM held on 5.7.1994 in which
decision was taken to raise the share capital of the company was,
admittedly, not given to the Sanwalka Group though they were entitled to
such notice. Insofar as correctness of the issue of 3065 ordinary equity
shares against the preference shares is concerned, the Company Law Board
felt that it would be inappropriate to go into the said question as a
related issue was pending before the Delhi High Court with regard to the
very same preference shares. In fact, the issue before the High Court
involved the question as to whether the said shares did exist at all or
stood extinguished prior to the date of conversion. Insofar as the lease of
the industrial plot is concerned, the CLB felt that the same should be left
open for an appropriate decision of the company in a General Body Meeting
to be held on the basis of the revised share holding as ordered by the CLB.
11. Aggrieved by the aforesaid order of the CLB with regard to the
maintainability of the company petition, issue of bonus shares and 25,000
ordinary equity shares and also the re-induction of the members of the
Sanwalka Group in the Board of Directors, the Gupta Group moved the
Calcutta High Court by filing an appeal under Section 10F of the Act.
Challenging the decision of the Board insofar as the issue of 3065
preference shares and the lease in respect of the industrial plot is
concerned, the Sanwalka Group had filed a separate appeal. The High Court,
by its impugned order dated 14.9.2005, dismissed both sets of appeal
leading to the institution of the present appeals before this Court.
12. On the basis of the issues dealt with by the CLB and the High Court
and the arguments advanced on behalf of the parties the issues arising in
the two appeals may be summarised as follows:
Maintainability of the company petition filed by the Sanwalka Group before
the Company Law Board.
Legality of the issue of bonus shares by the company;
Legality of the issue of 25,000 new ordinary shares ;
Legality of the removal of the representatives of the Sanwalka Group from
the Board of Directors and the induction of the members of Gupta Group in
their place;
Legality of the lease agreement executed by the company in respect of the
industrial plot;
Legality of the issue of 3065 ordinary equity shares as against the
preference shares.
13. We have heard Shri Arvind P. Datar learned senior counsel appearing
for the Gupta Group and Shri C.A. Sundaram learned senior counsel appearing
for the Sanwalka Group.
14. The questions arising, as noticed above, may now be taken up for
consideration.
Maintainability of the Company Petition –
Notwithstanding the very elaborate and persuasive arguments made by
both sides a resolution of the above question is possible by a close look
of the share certificates issued to the members of the Sanwalka Group after
allotment of the shares in question following the forfeiture of the same in
the hands of M/s. Gupta Brothers. Some of the share certificates in
question are on record. A reading thereof discloses that the same
constitute a fresh and independent allotment of the shares by reference to
their distinctive numbers specified therein. The certificates do not
contain any stipulation or condition that the same are being held either on
account of a third person or as beneficiaries on behalf of any third
person. The shares in question were allotted on payment of Rs.35 being the
application money (Rs.25) and allotment money (Rs.10). A further amount of
Rs.10/- per share was paid against the first call made on 7.8.1986.
Therefore, the share certificates, ex facie, do not support any of the
contentions advanced on behalf of Gupta Group, details of which have been
noticed hereinabove. If the shares were held by the members of the Sanwalka
Group in their own right without any connection to the erstwhile/forfeited
shares held by M/s. Gupta Brothers, the second question arising i.e.
failure to respond to the call notice dated 5.1.1991 really does not arise.
Be that as it may, the said notice required the members of the Sanwalka
Group to pay the unpaid value of the forfeited shares (which coincidentally
was also Rs.55/- per share i.e. same as the unpaid amount of the shares at
the time of forfeiture when held by M/s. Gupta Brothers) along with
interest. In this regard it was found by the CLB as well as the High Court
that even issue of notice of the call in terms of Section 53 of the Act had
not been proved by the Gupta Group. That apart, the call notice dated
5.1.1991 and forfeiture of the shares held by the Sanwalka Group, upon
alleged failure to comply with the said notice, does not appear to be
inconformity with Clauses 14 to 18 of the Articles of Association of the
Company, which are extracted below:–
“14. If any member fails to pay any call or instalment on or before the day
appointed for the payment of the same the Directors may at any time
thereafter during such time as the call or instalment or any part thereof
remains unpaid serve a notice on such member requiring him to pay the same
together with any interest that may have accrued and all expenses that the
company may have incurred. They may also write in any such notice that in
the event of failure to pay the amount so due before a particular date the
Directors shall proceed to forfeit the shares.” (emphasis is ours)
15. If the amount still remains unpaid the Directors may proceed to forfeit
the shares.
16. A notice of the resolution of forfeiture shall be given to the member
whose shares have been forfeited.
17. Any shares so forfeited shall be deemed to held the property of the
company and the Directors may sell, reallot annul the forfeiture or
otherwise dispose of the same in such a manner as they may think fit.
18. Any member whose shares have been forfeited shall notwithstanding such
forfeiture be liable to pay, and shall forthwith pay to the company all
calls instalments, interest and expenses owing upon or in respect of such
shares at the time of forfeiture/together with interest thereon, from the
time of forfeiture until payment at nine per cent per annum and the
Director may enforce the payment of such moneys or any part thereof if they
think fit, but shall not be under any obligation to do so. The member
whose shares have been forfeited shall not be entitled to claim the sale
proceeds of such shares.”
15. Not only the call notice dated 5.1.1991 had not been proved to have
been issued in the matter required under Section 53 of the Act, the notice
also does not mention the consequences of non-payment i.e. forfeiture.
Also the fastening of the liability on the Sanwalka Group to pay the unpaid
amount of the forfeited shares along with interest is plainly contrary to
the provisions of Article 18 of the Articles of Association, extracted
above. Besides, the date of the forfeiture also is not clear though it
appears that in a Board Meeting held on 2.8.1995 a decision was taken to
restore the said shares to M/s. Gupta Brothers. The reason for the said
decision appears to be to comply with an order of attachment of the shares
passed earlier by the Civil Court. All these would demonstrate the apparent
falsity of the claim now made that the forfeiture was due to failure of the
Sanwalka Group to comply with the terms of the call notice dated 5.1.1991.
16. To overcome the aforesaid difficulties, an argument has been made on
behalf of Gupta Group that even if the call notice dated 5.1.1991 is not to
be relied upon, in the Balance Sheet dated 31.3.1992 the amounts due have
been shown as calls-in-arrears. The said document was duly circulated. The
Sanwalka Group, therefore, had full knowledge that unpaid call money is
due.
17. Besides the fact that there is no co-relation between the amounts
mentioned in the call notice dated 5.1.1991 and the Balance Sheet dated
31.3.1992, the members of the Sanwalka Group were removed from the Board of
Directors on 1.7.1991 i.e. before the finalisation of the Balance Sheet
dated 31.3.1992. In any case, the procedure for forfeiture of shares as a
consequence of failure to respond to a call notice are unambiguously set
out in details in the Articles of Association of the Company, extracted
above. A balance sheet does not and cannot operate as an alternative to a
call notice.
18. If the primary question i.e. maintainability of the company petition
has to be answered in favour of the Sanwalka Group, as we are inclined to,
the other issues highlighted in the earlier part of this order would now
have to be considered.
Issue of 25,000 ordinary equity shares -
19. There is no denial of the fact that notice of the E.O.G.M. dated
5.7.1994 was not given to the members of the Sanwalka Group though they,
admittedly, continued to be members of the company on the date of the
meeting. It is pursuant to the decision taken in the said E.O.G.M. dated
5.7.1994 to raise the share capital of the company from Rs.10 lakh to Rs.5
crores that the other decisions with regard to bonus shares; the issue of
25,000 ordinary equity shares and the conversion of preference shares to
equity shares were made subsequently. Such notice is mandatory under
Section 172(2) read with Section 41 of the Act. This is, ex facie, apparent
from the reading of the said provisions of the Act. Reference to the
elaborate case laid before us on this score would, therefore, not be
required.
20. Specifically, so far as the issue of bonus shares is concerned, the
arguments laid down before us would require a consideration whether Section
205(3) of the Act, particularly, the proviso thereto permits issue of bonus
shares out of revaluation reserves of a company. The further question that
would arise is the correct interplay between the provisions of the Act and
those contained in the Articles of Association of a Company. So far as the
issue with regard to utilization of reserves arising from revaluation of
assets for the purpose of issuing fully paid bonus shares is concerned, the
same has been held to be permissible in Bhagwati Developers Vs. Peerless
General Finance & Investment Co. & Ors.[1]. However, it has to be noticed
that in Bhagwati Developers (supra) the Articles of Association (Article
182) specifically permitted/contemplated such a course of action. In the
present case, the Articles of Association of the Company do not empower the
Directors to so act. No such situation i.e. issue of bonus shares out of
revaluation reserve is contemplated. When the Articles of the Company do
not confer any such power in the Board exercise thereof on the basis that
the Act so provides would be impermissible. Enabling provisions under the
Act would require incorporation in the Articles of a company. To the above
effect the view of this Court in Para 25 of the Claude-Lila Parulekar
(Smt.) Vs. Sakal Papers (P) Ltd. & Ors.[2] is relevant –
“25. Section 36 of the Companies Act, 1956 makes the memorandum and
articles of the company, when registered, binding not only on the company
but also the members inter se to the same extent as if they had been signed
by the company and by each member and covenanted to by the company and each
shareholder to observe all the provisions of the memorandum and of the
articles. The articles of association constitute a contract not merely
between the shareholders and the company but between the individual
shareholders also. The articles are a source of power of the Directors who
can as a result exercise only those powers conferred by the articles in
accordance therewith. Any action referable to the articles and contrary
thereto would be ultra vires.”
21. That apart, the resolution of the Board dated 5.7.1994 pursuant to
which bonus shares were issued indicates that the real purpose for issue of
the bonus shares is to raise funds which were badly needed by the company
at that point of time. On the very face of it, the purpose indicated in the
resolution is a sham and a pretence inasmuch as revaluation of the existing
assets of the company and issuance of bonus shares against such revaluation
could not and did not generate any additional funds as the additional
capital available is purely fictional or notional. A self serving interest
of the Gupta Group (who received all the bonus shares issued) in issuing
the bonus shares, therefore, is evident.
22. So far as the issue of 25,000 equity shares is concerned, there can
be no manner of doubt that the decision of the Board to issue the said
shares has to be tested in the light of the wide powers of the Board to act
in such matters as has been laid down by this Court in Needle Industries
(India) Ltd. & Ors. Vs. Needle Industries Newey (India) Holding Ltd. &
Ors.[3]. The power of the Board of Directors of the Company to issue fresh
shares must always be viewed as an adjunct of its extensive powers under
the Act and the bona fides of such an exercise cannot be called into
question by construing the power to issue fresh shares to be limited by any
particular purpose or purposes. This was the view of the Company Law Board
also. However, the same would not detract from the fundamental principle
of fair play that is to be expected from the Board of Directors in making a
fair and proportionate distribution/allotment of such fresh shares. The
direction of the Company Law Board upheld by the High Court, namely, that
allotment from the aforesaid 25,000 newly issued ordinary equity shares
should be proportionate to the share holding of the two groups taking the
members of the Sanwalka Group as having continued to be members of the
company, will, therefore, not require any interference.
23. Insofar the issue of 3065 ordinary equity shares in lieu of 3065
preference shares is concerned, the CLB and the High Court had thought it
proper to leave the matter for a just determination by the Delhi High Court
in view of the suit filed by the Sanwalka Group contending that the said
shares had ceased to exist in the year 1967 and therefore no equity shares
could have been issued in lieu of the said preference shares as has been
done. The suit in question which is of the year 1996 may take some further
time for resolution. In such circumstances, the apprehension of the
Sanwalka group is that if the equity shares issued against the said
preference shares are allowed to remain alive and valid the balance would
still tilt in favour of the Gupta Group.
24. It is not known whether the High Court had been requested by the
parties to make an interim arrangement and if so the result thereof.
However, before us, the Gupta Group has sought to contend that the above
apprehension of the Sanwalka Group is unfounded. It is claimed that it is
not correct that by virtue of the conversion of the 3065 preference shares
into equity shares the Gupta Group has emerged in the majority for the
first time. Even prior to such conversion, the Gupta Group was in a
majority inasmuch as the preference shares always carried a right to vote.
Therefore, even on the basis of the original share holding, the Gupta Group
was in majority.
25. We cannot countenance the aforesaid submission advanced on behalf of
the Gupta Group in view of the provisions of Section 87 of the Act
particularly sub-section (2) thereof which is in the following terms:
“(2) (a) Subject as aforesaid and save as provided in clause (b) of this
sub-section, every member of a company limited by shares and holding any
preference share capital therein shall, in respect of such capital, have a
right to vote only on resolutions placed before the company which directly
affect the rights attached to his preference shares.
Explanation. : Any resolution for winding up the company or for the
repayment or reduction of its share capital shall be deemed directly to
affect the rights attached to preference shares within the meaning of this
clause.
(b) Subject as aforesaid, every member of a company limited by shares and
holding any preference share capital therein shall, in respect of such
capital, be entitled to vote on every resolution placed before the company
at any meeting, if the dividend due on such capital or any part of such
dividend has remained unpaid :
(i) in the case of cumulative preference shares, in respect of an aggregate
period of not less than two years preceding the date of commencement of the
meeting ; and
(ii) in the case of non-cumulative preference shares, either in respect of
a period of not less than two years ending with the expiry of the financial
year immediately preceding the commencement of the meeting or in respect of
an aggregate period of not less than three years comprised in the six years
ending with the expiry of the financial year aforesaid.
Explanation. : For the purposes of this clause, dividend shall be deemed to
be due on preference shares in respect of any period, whether a dividend
has been declared by the company on such shares for such period or not,
(a) on the last day specified for the payment of such dividend for such
period, in the articles or other instrument executed by the company in that
behalf ; or
(b) in case no day is so specified, on the day immediately following such
period.
(c) where the holder of any preference share has a right to vote on any
resolution in accordance with the provisions of this sub-section, his
voting right on a poll, as the holder of such share, shall, subject to the
provisions of section 89 and sub-section (2) of section 92, be in the same
proportion as the capital paid up in respect of the preference share bears
to the total paid-up equity capital of the company.”
26. A reading of the aforesaid Section 87 (2) would clearly indicate that
except in situations where dividends have not been paid, holders of
preference shares do not have a right to vote except in matters which
directly affects the rights attached to the preference shares.
27. Reliance has been placed on Articles 20, 21 and 22 of the Articles of
Association of the Company to claim voting rights against the preference
shares held by the Gupta Group. It will therefore be necessary to take
note of the said Articles which are in the following terms:
“20. The following rights are attached to these shares as regards
dividends, voting rights and redemption –
Preference shares shall carry a fixed cumulative free of Income-tax
dividend @ of 6% per annum in preference to ordinary or any other class of
shares.
Preference shares shall be redeemable at any time after a period of 5 or 10
years from the date of allotment at the option of Directors of the company
or at the option of the holder thereof respectively, provided a notice of
three months in writing is given by the company to the holders thereof or
vice-versa as the case may be.
After payment cumulative dividend of 6% free of tax on preference shares,
the balance of the net divisible profits (as may be recommended by the
directors) shall be utilized for payment of dividend @ 9% on ordinary
shares.
Any net divisible profits as may be recommended by the Directors remaining
after payment of cumulative dividend or preference shares and dividend on
ordinary shares as mentioned above shall be divided between the preference
and ordinary shares equally on the basis of paid up capital in the company.
Preference shares shall also have a preference for repayment of capital at
the time of the winding up of the company in preference to any class of
shares.
21. On show of hand every shareholders present in shall have one vote and
upon poll every shareholder present in person or any proxy shall have one
vote for each share held by him or her. A poll may be demanded in
accordance with law.
22. A holder of any shares shall not be entitled to a vote either by show
of hand or at poll unless there have been paid to the company all sums of
money then due from that holder in respect of these shares.”
28. The aforesaid Articles must necessarily have to be understood in the
light of the provisions of Section 87 particularly those contained in sub-
Section (2). The meaning sought to be given to Articles 20, 21 and 22,
extracted above, namely, that every share holder including the holder of a
preference share has a right to vote cannot be readily accepted. The
resolution of the Board dated 5.7.1994 relating to the conversion of
preference shares into equity shares proceeds on the basis that dividends
in respect of the 3065 shares have not been paid and in lieu thereof the
shareholders had agreed to receive an equivalent number of equity shares.
The above statement of fact is difficult to accept. Neither is the period
during which dividends had not been paid is specified, nor is the amount
due indicated. No material has been laid to show that the 3065 equity
shares represent a fair value of the dividends claimed to be unpaid. What
cannot also be lost sight of is that the preference shares in question were
held by the Gupta Group who was in control of the company at that point of
time. A number of self serving decisions by the Gupta Group and its conduct
of the business of the company in a manner detrimental to the interest of
the company, as discussed hereinabove, would make it extremely perilous to
rely on the version available in the resolution of the Board for allotment
of 3065 equity shares in place of the preference shares in question. In
the above circumstances it would be just and proper to strike down the
conversion of the 3065 preference shares into equity shares and revert the
preference shares to its earlier status to be dealt with in the future in
accordance with law. This is, of course, subject to the orders of the Delhi
High Court in the appeal pending before it.
Lease of the Industrial Plot
29. If the forums below have left the above matter for a just
determination in an Extra Ordinary General Meeting of the Company, in view
of the directions hereinabove, we do not consider it necessary to deal with
the said aspect of the case any further.
30. Before parting, certain subsidiary issues raised on behalf of the
parties may be briefly noticed if only to make the discussion complete.
The failure of the High Court to frame a substantial question of law to
hear the appeal before it can hardly invalidate the order passed. The
order of the High Court is an order of affirmation; further there is no
provision in Section 10F of the Act which is akin to the provisions
contained in Section 100 (4) of the Code of Civil Procedure, 1908.
31. The argument that having regard to the conduct of the Gupta Group in
managing the affairs of the Company and all decisions taken being in the
best interest of the Company, no case for winding up is made out so as to
justify the exercise of powers under Section 397/398 of the Act by the CLB,
would hardly require a detailed consideration in view of the specific
findings of the High Court in this regard, which are wholly adverse to the
Gupta Group. The said view and the conclusions reached have our approval,
as already indicated. Besides, the High Court in the order under challenge
has taken into account that apart from the industrial plot in question the
Company has no subsisting business and that the terms of the lease entered
into by the Gupta Group in respect of the said property are wholly adverse
to the Company’s interest.
32. The question whether a single act of oppression would enable the CLB
to intervene or oppression must be the cumulative result of continuous acts
should not require any debate in the facts of the present case which
demonstrate a series of unacceptable decisions and actions on the part of
the Gupta Group. In the last resort, satisfaction that oppression has been
committed has to be reached in the facts of each case.
33. In view of the above discussions and for the reasons alluded, Civil
Appeal No.589 of 2010 filed by the Gupta Group is dismissed whereas Civil
Appeal No.599 of 2010 filed by the Sanwalka Group is disposed of with
directions, as contained in the present order.
….……......................,J.
[RANJAN GOGOI]
….……......................,J.
[PRAFULLA C.
PANT]
NEW DELHI;
OCTOBER 07, 2016.
-----------------------
[1] (2005) 6 SCC 718
[2] (2005) 11 SCC 73
[3] (1981) 3 SCC 333
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 589 OF 2010
Tin Plate Dealers Association Pvt. Ltd. & Ors. ...Appellant (s)
Versus
Satish Chandra Sanwalka & Ors. ...Respondent (s)
With
CIVIL APPEAL NO.599 OF 2010
J U D G M E N T
RANJAN GOGOI, J.
Both the appeals being against the common judgment and order of the High
Court of Calcutta dated 14th September, 2005 were heard together and are
being dealt with by this common order.
The appellant in Civil Appeal No. 589 of 2010 is a private limited company
incorporated in the year 1948 with its registered office at Calcutta. The
appellants 2 to 5 (hereinafter referred to as the ‘Gupta Group’) had come
into control of the company by actions and omissions complained of by
respondents 1 to 7 in the said appeal i.e. C.A. No.589 of 2010 which had
led to the institution of the company petition under Section 397/398 of the
Companies Act, 1956 (hereinafter referred to as the ‘Act’). The said
respondents may be conveniently referred to as the “Sanwalka Group”.
At the time of its incorporation, the authorised capital of the company was
Rs. 10 lakh consisting of 4,000 redeemable cumulative preference shares of
Rs. 100/- each and 6,000 ordinary shares of Rs. 100/- each. The paid-up
capital of the company before the issue of new, ordinary and bonus shares,
which is the bone of contention between the parties, consisted of 4132
partly paid ordinary shares and 1868 fully paid ordinary shares besides
3065 fully paid preference shares. One M/s. Gupta Brothers originally held
the 4132 partly paid shares. The said shares were forfeited sometime in
the year 1966 and thereafter the same were issued to the Sanwalka Group who
paid a total of Rs.45 for each share consisting of payment at the time of
application and allotment and Rs.10/- per share on a call being made
subsequently. Whereas, according to Gupta Group, these shares were held by
the Sanwalka Group on behalf of Gupta Brothers, the said fact is denied by
the Sanwalka Group. According to the Sanwalka Group, the Gupta Group
without notice to them had increased the authorized capital of the company
to Rs. 5 crores in an Extra Ordinary General Meeting of the Company held on
5.7.1994. No notice of the said meeting was given to the Sanwalka Goup. A
Board Meeting was held on the same day i.e. 5.7.1994 to give effect to the
above decision taken in the E.O.G.M. to increase the share capital of the
company. In the said Board meeting, a follow up decision was taken to allot
bonus shares at the ratio of 60 bonus shares for every fully paid up
preference and equity share held. The said bonus shares were to be issued
against revaluation of the industrial plot in Okhla Industrial Area, New
Delhi which was the only asset of the company at that time. This was not
contemplated by the Articles of Association of the Company, according to
the Sanwalka Group. In any case, no bonus shares were allotted to them.
Further more, according to the Sanwalka Group, pursuant to the decision
taken on 5.7.1994, in August, 1995 the company issued 3065 equity shares to
the holders of the preference shares (Gupta Group). In February, 1996,
25,000 ordinary equity shares were again issued to the members of the Gupta
Group against which Rs.40 per share was paid. The said issue was ostensibly
to raise additional capital for the company. This allotment was, however,
to the exclusion of the Sanwalka Group. Contending that the aforesaid acts
had the effect of reducing the Sanwalka Group, which was otherwise in the
majority, to a negligible minority in the company, the company petition
alleging oppression was filed before the Company Law Board wherein the act
of removing two members of the Sanwalka Group from the Board of Directors
(w.e.f.1.7.1991) and inducting two others of the Gupta Group in their place
was also called into question.
From the reply filed by the Gupta Group to the company petition it
transpired that the 4132 partly paid shares held by the Sanwalka Group
stood forfeited. The aforesaid forfeiture was therefore challenged in the
company petition with a claim that the said shares be restored to the
members of the Sanwalka group. During the subsistence of the company
petition, supplementary applications were also filed challenging the action
of the Gupta Group in leasing out the industrial plot to sister concerns on
terms claimed to be prejudicial to the interest of the company and of the
shareholders.
The eventual reliefs prayed for in the Company Petition in the light of
the averments made in the said petition and the supplementary applications
were for:
restoration of the names of the members of the Sanwalka Group in the
register of members of the company;
cancellation of the allotment of bonus shares;
cancellation of the issue and allotment of 25000 partly paid up ordinary
equity shares to the Gupta Group;
cancellation of 3065 equity shares to the holders of the 3065 preference
shares;
cancellation of the lease agreement in respect of the industrial plot and
restoration of the names of the concerned members of the Sanwalka Group as
Directors of the Company.
6. The Company Petition was opposed by Gupta Group as not maintainable
in law. According to the Gupta Group, the shares held by the members of the
Sanwalka Group stood forfeited and the holders thereof had ceased to be
members of the company. Such forfeiture, according to the Gupta Group, was
in the following circumstances.
The said shares were held by the Sanwalka Group as beneficiaries on behalf
of the original holders i.e. M/s. Gupta Brothers. As the shares held by the
Gupta Brothers were partly paid, the Sanwalka Group as beneficiary holders,
was liable to pay the unpaid value of the said shares along with interest
therein on a call being made by the company. Such a call, according to the
Gupta Group, was made on 05.01.1991 which went unanswered. Consequently,
the aforesaid shares were forfeited. There was an alternative contention
advanced by Gupta Group to the effect that in any event the Sanwalka Group
were holders of partly paid shares and they having not responded to the
call notice dated 5.1.1991, the company petition was not maintainable under
Section 399 of the Act.
7. The claim of the Sanwalka Group that the issue of bonus shares was
not authorized as the same could not have been issued again the revaluation
reserve was resisted by the Gupta Group by specific reference to the
relevant provisions of the Companies Act, details of which will be noticed
later. It was claimed that in the Board Meeting dated 5.7.1994
proportionate allotment of bonus shares against the 4132 partly paid shares
in which the Sanwalka Group held a beneficial interest was offered subject
to payment of the dues against the said shares in term of the call notice
dated 5.1.1991. Insofar as the issue of 25,000 ordinary shares is
concerned, it was contended by the Gupta Group that the said shares were
issued to infuse badly needed capital into the company. In view of the
clear and expressed disinterest of the Sanwalka Group in the affairs of the
company evidenced by their long silence and failure to respond to the call
notice dated 5.1.1991 and also to participate in the Board meetings, it was
understood by the Gupta Group that they would not be interested in
allotment of any part of the newly issued share capital i.e. 25,000 shares.
In any case, according to the Gupta Group, as the members of the Sanwalka
Group had ceased to be members of the company (1995) by the time the 25,000
shares were issued/allotted (February, 1996) they were not entitled to
allotment of any of the said newly issued shares.
8. Insofar as the lease in respect of the industrial plot is concerned,
it was urged on behalf of Gupta Group that the same was done in
consideration of the funds made available by the lessees to raise
construction on the land which was necessary to pre-empt an imminent
forfeiture of the lease itself. The actions of the company, therefore, were
claimed to be in the interest of the company.
9. The Company Law Board (CLB) by an elaborate order dated 1.3.2001
overruled the objections raised by the Gupta Group to the maintainability
of the petition. The CLB concluded that the shares held by the members of
the Sanwalka Group were in their own right, independent of any right of
M/s. Gupta Brothers all of which stood extinguished upon forfeiture of the
shares held by the said Gupta Brothers. The CLB further held that under
Article 18 of the Articles of Association of the Company, it is M/s. Gupta
Brothers who were liable to pay the dues, if any, on the said forfeited
shares. The Board also found that the members of the Sanwalka Group had
paid Rs.45 per share and though there were an obligation to pay the balance
on a call being made the materials on record did not disclose that any such
call was made at any point of time. In this regard the notice dated
5.1.1991 was held by the CLB not to be duly proved to have been issued
following the procedure under Section 53 of the Act. It was also held that
the said notice dated 5.1.1991 did not contemplate forfeiture of the shares
in the event of failure to pay the call money as required under Clause 14
of the Articles of Association of the Company. On the basis of the said
findings the twin objections raised by the Gupta Group to the
maintainability of the company petition was held against them.
10. The CLB by its order dated 01.03.2001 further held that the issue of
bonus shares against revaluation reserve was contrary to the provisions of
Article 96 of Table A of the Act of 1956. So far as the issue of 25,000
ordinary equity shares is concerned, the CLB decided the issue in favour of
the Gupta Group. However, as the members of the Sanwalka Group continued to
be members of the company, it was held that proportionate allotment of the
said equity shares should have been made to them also. The removal of the
two representatives of the Sanwalka Group from the Board was also held to
be bad on the aforesaid count. Of particular significance would be the
finding of the Board that notice of the EOGM held on 5.7.1994 in which
decision was taken to raise the share capital of the company was,
admittedly, not given to the Sanwalka Group though they were entitled to
such notice. Insofar as correctness of the issue of 3065 ordinary equity
shares against the preference shares is concerned, the Company Law Board
felt that it would be inappropriate to go into the said question as a
related issue was pending before the Delhi High Court with regard to the
very same preference shares. In fact, the issue before the High Court
involved the question as to whether the said shares did exist at all or
stood extinguished prior to the date of conversion. Insofar as the lease of
the industrial plot is concerned, the CLB felt that the same should be left
open for an appropriate decision of the company in a General Body Meeting
to be held on the basis of the revised share holding as ordered by the CLB.
11. Aggrieved by the aforesaid order of the CLB with regard to the
maintainability of the company petition, issue of bonus shares and 25,000
ordinary equity shares and also the re-induction of the members of the
Sanwalka Group in the Board of Directors, the Gupta Group moved the
Calcutta High Court by filing an appeal under Section 10F of the Act.
Challenging the decision of the Board insofar as the issue of 3065
preference shares and the lease in respect of the industrial plot is
concerned, the Sanwalka Group had filed a separate appeal. The High Court,
by its impugned order dated 14.9.2005, dismissed both sets of appeal
leading to the institution of the present appeals before this Court.
12. On the basis of the issues dealt with by the CLB and the High Court
and the arguments advanced on behalf of the parties the issues arising in
the two appeals may be summarised as follows:
Maintainability of the company petition filed by the Sanwalka Group before
the Company Law Board.
Legality of the issue of bonus shares by the company;
Legality of the issue of 25,000 new ordinary shares ;
Legality of the removal of the representatives of the Sanwalka Group from
the Board of Directors and the induction of the members of Gupta Group in
their place;
Legality of the lease agreement executed by the company in respect of the
industrial plot;
Legality of the issue of 3065 ordinary equity shares as against the
preference shares.
13. We have heard Shri Arvind P. Datar learned senior counsel appearing
for the Gupta Group and Shri C.A. Sundaram learned senior counsel appearing
for the Sanwalka Group.
14. The questions arising, as noticed above, may now be taken up for
consideration.
Maintainability of the Company Petition –
Notwithstanding the very elaborate and persuasive arguments made by
both sides a resolution of the above question is possible by a close look
of the share certificates issued to the members of the Sanwalka Group after
allotment of the shares in question following the forfeiture of the same in
the hands of M/s. Gupta Brothers. Some of the share certificates in
question are on record. A reading thereof discloses that the same
constitute a fresh and independent allotment of the shares by reference to
their distinctive numbers specified therein. The certificates do not
contain any stipulation or condition that the same are being held either on
account of a third person or as beneficiaries on behalf of any third
person. The shares in question were allotted on payment of Rs.35 being the
application money (Rs.25) and allotment money (Rs.10). A further amount of
Rs.10/- per share was paid against the first call made on 7.8.1986.
Therefore, the share certificates, ex facie, do not support any of the
contentions advanced on behalf of Gupta Group, details of which have been
noticed hereinabove. If the shares were held by the members of the Sanwalka
Group in their own right without any connection to the erstwhile/forfeited
shares held by M/s. Gupta Brothers, the second question arising i.e.
failure to respond to the call notice dated 5.1.1991 really does not arise.
Be that as it may, the said notice required the members of the Sanwalka
Group to pay the unpaid value of the forfeited shares (which coincidentally
was also Rs.55/- per share i.e. same as the unpaid amount of the shares at
the time of forfeiture when held by M/s. Gupta Brothers) along with
interest. In this regard it was found by the CLB as well as the High Court
that even issue of notice of the call in terms of Section 53 of the Act had
not been proved by the Gupta Group. That apart, the call notice dated
5.1.1991 and forfeiture of the shares held by the Sanwalka Group, upon
alleged failure to comply with the said notice, does not appear to be
inconformity with Clauses 14 to 18 of the Articles of Association of the
Company, which are extracted below:–
“14. If any member fails to pay any call or instalment on or before the day
appointed for the payment of the same the Directors may at any time
thereafter during such time as the call or instalment or any part thereof
remains unpaid serve a notice on such member requiring him to pay the same
together with any interest that may have accrued and all expenses that the
company may have incurred. They may also write in any such notice that in
the event of failure to pay the amount so due before a particular date the
Directors shall proceed to forfeit the shares.” (emphasis is ours)
15. If the amount still remains unpaid the Directors may proceed to forfeit
the shares.
16. A notice of the resolution of forfeiture shall be given to the member
whose shares have been forfeited.
17. Any shares so forfeited shall be deemed to held the property of the
company and the Directors may sell, reallot annul the forfeiture or
otherwise dispose of the same in such a manner as they may think fit.
18. Any member whose shares have been forfeited shall notwithstanding such
forfeiture be liable to pay, and shall forthwith pay to the company all
calls instalments, interest and expenses owing upon or in respect of such
shares at the time of forfeiture/together with interest thereon, from the
time of forfeiture until payment at nine per cent per annum and the
Director may enforce the payment of such moneys or any part thereof if they
think fit, but shall not be under any obligation to do so. The member
whose shares have been forfeited shall not be entitled to claim the sale
proceeds of such shares.”
15. Not only the call notice dated 5.1.1991 had not been proved to have
been issued in the matter required under Section 53 of the Act, the notice
also does not mention the consequences of non-payment i.e. forfeiture.
Also the fastening of the liability on the Sanwalka Group to pay the unpaid
amount of the forfeited shares along with interest is plainly contrary to
the provisions of Article 18 of the Articles of Association, extracted
above. Besides, the date of the forfeiture also is not clear though it
appears that in a Board Meeting held on 2.8.1995 a decision was taken to
restore the said shares to M/s. Gupta Brothers. The reason for the said
decision appears to be to comply with an order of attachment of the shares
passed earlier by the Civil Court. All these would demonstrate the apparent
falsity of the claim now made that the forfeiture was due to failure of the
Sanwalka Group to comply with the terms of the call notice dated 5.1.1991.
16. To overcome the aforesaid difficulties, an argument has been made on
behalf of Gupta Group that even if the call notice dated 5.1.1991 is not to
be relied upon, in the Balance Sheet dated 31.3.1992 the amounts due have
been shown as calls-in-arrears. The said document was duly circulated. The
Sanwalka Group, therefore, had full knowledge that unpaid call money is
due.
17. Besides the fact that there is no co-relation between the amounts
mentioned in the call notice dated 5.1.1991 and the Balance Sheet dated
31.3.1992, the members of the Sanwalka Group were removed from the Board of
Directors on 1.7.1991 i.e. before the finalisation of the Balance Sheet
dated 31.3.1992. In any case, the procedure for forfeiture of shares as a
consequence of failure to respond to a call notice are unambiguously set
out in details in the Articles of Association of the Company, extracted
above. A balance sheet does not and cannot operate as an alternative to a
call notice.
18. If the primary question i.e. maintainability of the company petition
has to be answered in favour of the Sanwalka Group, as we are inclined to,
the other issues highlighted in the earlier part of this order would now
have to be considered.
Issue of 25,000 ordinary equity shares -
19. There is no denial of the fact that notice of the E.O.G.M. dated
5.7.1994 was not given to the members of the Sanwalka Group though they,
admittedly, continued to be members of the company on the date of the
meeting. It is pursuant to the decision taken in the said E.O.G.M. dated
5.7.1994 to raise the share capital of the company from Rs.10 lakh to Rs.5
crores that the other decisions with regard to bonus shares; the issue of
25,000 ordinary equity shares and the conversion of preference shares to
equity shares were made subsequently. Such notice is mandatory under
Section 172(2) read with Section 41 of the Act. This is, ex facie, apparent
from the reading of the said provisions of the Act. Reference to the
elaborate case laid before us on this score would, therefore, not be
required.
20. Specifically, so far as the issue of bonus shares is concerned, the
arguments laid down before us would require a consideration whether Section
205(3) of the Act, particularly, the proviso thereto permits issue of bonus
shares out of revaluation reserves of a company. The further question that
would arise is the correct interplay between the provisions of the Act and
those contained in the Articles of Association of a Company. So far as the
issue with regard to utilization of reserves arising from revaluation of
assets for the purpose of issuing fully paid bonus shares is concerned, the
same has been held to be permissible in Bhagwati Developers Vs. Peerless
General Finance & Investment Co. & Ors.[1]. However, it has to be noticed
that in Bhagwati Developers (supra) the Articles of Association (Article
182) specifically permitted/contemplated such a course of action. In the
present case, the Articles of Association of the Company do not empower the
Directors to so act. No such situation i.e. issue of bonus shares out of
revaluation reserve is contemplated. When the Articles of the Company do
not confer any such power in the Board exercise thereof on the basis that
the Act so provides would be impermissible. Enabling provisions under the
Act would require incorporation in the Articles of a company. To the above
effect the view of this Court in Para 25 of the Claude-Lila Parulekar
(Smt.) Vs. Sakal Papers (P) Ltd. & Ors.[2] is relevant –
“25. Section 36 of the Companies Act, 1956 makes the memorandum and
articles of the company, when registered, binding not only on the company
but also the members inter se to the same extent as if they had been signed
by the company and by each member and covenanted to by the company and each
shareholder to observe all the provisions of the memorandum and of the
articles. The articles of association constitute a contract not merely
between the shareholders and the company but between the individual
shareholders also. The articles are a source of power of the Directors who
can as a result exercise only those powers conferred by the articles in
accordance therewith. Any action referable to the articles and contrary
thereto would be ultra vires.”
21. That apart, the resolution of the Board dated 5.7.1994 pursuant to
which bonus shares were issued indicates that the real purpose for issue of
the bonus shares is to raise funds which were badly needed by the company
at that point of time. On the very face of it, the purpose indicated in the
resolution is a sham and a pretence inasmuch as revaluation of the existing
assets of the company and issuance of bonus shares against such revaluation
could not and did not generate any additional funds as the additional
capital available is purely fictional or notional. A self serving interest
of the Gupta Group (who received all the bonus shares issued) in issuing
the bonus shares, therefore, is evident.
22. So far as the issue of 25,000 equity shares is concerned, there can
be no manner of doubt that the decision of the Board to issue the said
shares has to be tested in the light of the wide powers of the Board to act
in such matters as has been laid down by this Court in Needle Industries
(India) Ltd. & Ors. Vs. Needle Industries Newey (India) Holding Ltd. &
Ors.[3]. The power of the Board of Directors of the Company to issue fresh
shares must always be viewed as an adjunct of its extensive powers under
the Act and the bona fides of such an exercise cannot be called into
question by construing the power to issue fresh shares to be limited by any
particular purpose or purposes. This was the view of the Company Law Board
also. However, the same would not detract from the fundamental principle
of fair play that is to be expected from the Board of Directors in making a
fair and proportionate distribution/allotment of such fresh shares. The
direction of the Company Law Board upheld by the High Court, namely, that
allotment from the aforesaid 25,000 newly issued ordinary equity shares
should be proportionate to the share holding of the two groups taking the
members of the Sanwalka Group as having continued to be members of the
company, will, therefore, not require any interference.
23. Insofar the issue of 3065 ordinary equity shares in lieu of 3065
preference shares is concerned, the CLB and the High Court had thought it
proper to leave the matter for a just determination by the Delhi High Court
in view of the suit filed by the Sanwalka Group contending that the said
shares had ceased to exist in the year 1967 and therefore no equity shares
could have been issued in lieu of the said preference shares as has been
done. The suit in question which is of the year 1996 may take some further
time for resolution. In such circumstances, the apprehension of the
Sanwalka group is that if the equity shares issued against the said
preference shares are allowed to remain alive and valid the balance would
still tilt in favour of the Gupta Group.
24. It is not known whether the High Court had been requested by the
parties to make an interim arrangement and if so the result thereof.
However, before us, the Gupta Group has sought to contend that the above
apprehension of the Sanwalka Group is unfounded. It is claimed that it is
not correct that by virtue of the conversion of the 3065 preference shares
into equity shares the Gupta Group has emerged in the majority for the
first time. Even prior to such conversion, the Gupta Group was in a
majority inasmuch as the preference shares always carried a right to vote.
Therefore, even on the basis of the original share holding, the Gupta Group
was in majority.
25. We cannot countenance the aforesaid submission advanced on behalf of
the Gupta Group in view of the provisions of Section 87 of the Act
particularly sub-section (2) thereof which is in the following terms:
“(2) (a) Subject as aforesaid and save as provided in clause (b) of this
sub-section, every member of a company limited by shares and holding any
preference share capital therein shall, in respect of such capital, have a
right to vote only on resolutions placed before the company which directly
affect the rights attached to his preference shares.
Explanation. : Any resolution for winding up the company or for the
repayment or reduction of its share capital shall be deemed directly to
affect the rights attached to preference shares within the meaning of this
clause.
(b) Subject as aforesaid, every member of a company limited by shares and
holding any preference share capital therein shall, in respect of such
capital, be entitled to vote on every resolution placed before the company
at any meeting, if the dividend due on such capital or any part of such
dividend has remained unpaid :
(i) in the case of cumulative preference shares, in respect of an aggregate
period of not less than two years preceding the date of commencement of the
meeting ; and
(ii) in the case of non-cumulative preference shares, either in respect of
a period of not less than two years ending with the expiry of the financial
year immediately preceding the commencement of the meeting or in respect of
an aggregate period of not less than three years comprised in the six years
ending with the expiry of the financial year aforesaid.
Explanation. : For the purposes of this clause, dividend shall be deemed to
be due on preference shares in respect of any period, whether a dividend
has been declared by the company on such shares for such period or not,
(a) on the last day specified for the payment of such dividend for such
period, in the articles or other instrument executed by the company in that
behalf ; or
(b) in case no day is so specified, on the day immediately following such
period.
(c) where the holder of any preference share has a right to vote on any
resolution in accordance with the provisions of this sub-section, his
voting right on a poll, as the holder of such share, shall, subject to the
provisions of section 89 and sub-section (2) of section 92, be in the same
proportion as the capital paid up in respect of the preference share bears
to the total paid-up equity capital of the company.”
26. A reading of the aforesaid Section 87 (2) would clearly indicate that
except in situations where dividends have not been paid, holders of
preference shares do not have a right to vote except in matters which
directly affects the rights attached to the preference shares.
27. Reliance has been placed on Articles 20, 21 and 22 of the Articles of
Association of the Company to claim voting rights against the preference
shares held by the Gupta Group. It will therefore be necessary to take
note of the said Articles which are in the following terms:
“20. The following rights are attached to these shares as regards
dividends, voting rights and redemption –
Preference shares shall carry a fixed cumulative free of Income-tax
dividend @ of 6% per annum in preference to ordinary or any other class of
shares.
Preference shares shall be redeemable at any time after a period of 5 or 10
years from the date of allotment at the option of Directors of the company
or at the option of the holder thereof respectively, provided a notice of
three months in writing is given by the company to the holders thereof or
vice-versa as the case may be.
After payment cumulative dividend of 6% free of tax on preference shares,
the balance of the net divisible profits (as may be recommended by the
directors) shall be utilized for payment of dividend @ 9% on ordinary
shares.
Any net divisible profits as may be recommended by the Directors remaining
after payment of cumulative dividend or preference shares and dividend on
ordinary shares as mentioned above shall be divided between the preference
and ordinary shares equally on the basis of paid up capital in the company.
Preference shares shall also have a preference for repayment of capital at
the time of the winding up of the company in preference to any class of
shares.
21. On show of hand every shareholders present in shall have one vote and
upon poll every shareholder present in person or any proxy shall have one
vote for each share held by him or her. A poll may be demanded in
accordance with law.
22. A holder of any shares shall not be entitled to a vote either by show
of hand or at poll unless there have been paid to the company all sums of
money then due from that holder in respect of these shares.”
28. The aforesaid Articles must necessarily have to be understood in the
light of the provisions of Section 87 particularly those contained in sub-
Section (2). The meaning sought to be given to Articles 20, 21 and 22,
extracted above, namely, that every share holder including the holder of a
preference share has a right to vote cannot be readily accepted. The
resolution of the Board dated 5.7.1994 relating to the conversion of
preference shares into equity shares proceeds on the basis that dividends
in respect of the 3065 shares have not been paid and in lieu thereof the
shareholders had agreed to receive an equivalent number of equity shares.
The above statement of fact is difficult to accept. Neither is the period
during which dividends had not been paid is specified, nor is the amount
due indicated. No material has been laid to show that the 3065 equity
shares represent a fair value of the dividends claimed to be unpaid. What
cannot also be lost sight of is that the preference shares in question were
held by the Gupta Group who was in control of the company at that point of
time. A number of self serving decisions by the Gupta Group and its conduct
of the business of the company in a manner detrimental to the interest of
the company, as discussed hereinabove, would make it extremely perilous to
rely on the version available in the resolution of the Board for allotment
of 3065 equity shares in place of the preference shares in question. In
the above circumstances it would be just and proper to strike down the
conversion of the 3065 preference shares into equity shares and revert the
preference shares to its earlier status to be dealt with in the future in
accordance with law. This is, of course, subject to the orders of the Delhi
High Court in the appeal pending before it.
Lease of the Industrial Plot
29. If the forums below have left the above matter for a just
determination in an Extra Ordinary General Meeting of the Company, in view
of the directions hereinabove, we do not consider it necessary to deal with
the said aspect of the case any further.
30. Before parting, certain subsidiary issues raised on behalf of the
parties may be briefly noticed if only to make the discussion complete.
The failure of the High Court to frame a substantial question of law to
hear the appeal before it can hardly invalidate the order passed. The
order of the High Court is an order of affirmation; further there is no
provision in Section 10F of the Act which is akin to the provisions
contained in Section 100 (4) of the Code of Civil Procedure, 1908.
31. The argument that having regard to the conduct of the Gupta Group in
managing the affairs of the Company and all decisions taken being in the
best interest of the Company, no case for winding up is made out so as to
justify the exercise of powers under Section 397/398 of the Act by the CLB,
would hardly require a detailed consideration in view of the specific
findings of the High Court in this regard, which are wholly adverse to the
Gupta Group. The said view and the conclusions reached have our approval,
as already indicated. Besides, the High Court in the order under challenge
has taken into account that apart from the industrial plot in question the
Company has no subsisting business and that the terms of the lease entered
into by the Gupta Group in respect of the said property are wholly adverse
to the Company’s interest.
32. The question whether a single act of oppression would enable the CLB
to intervene or oppression must be the cumulative result of continuous acts
should not require any debate in the facts of the present case which
demonstrate a series of unacceptable decisions and actions on the part of
the Gupta Group. In the last resort, satisfaction that oppression has been
committed has to be reached in the facts of each case.
33. In view of the above discussions and for the reasons alluded, Civil
Appeal No.589 of 2010 filed by the Gupta Group is dismissed whereas Civil
Appeal No.599 of 2010 filed by the Sanwalka Group is disposed of with
directions, as contained in the present order.
….……......................,J.
[RANJAN GOGOI]
….……......................,J.
[PRAFULLA C.
PANT]
NEW DELHI;
OCTOBER 07, 2016.
-----------------------
[1] (2005) 6 SCC 718
[2] (2005) 11 SCC 73
[3] (1981) 3 SCC 333
