Vijay Kumar Narang And Others v. Prakash Coach Builders P. Ltd. And Others (And Connected Appeals)

The Judgment of the Court was delivered by

D.V Shylendra Kumar, J.:— These three appeals presented under section 10F of the Companies Act, 1956 (for short “the Act”) are all directed against the common single order dated April 7, 2004 (Vijay Kumar Narang v. Prakash Coach Builders P. Ltd., [2005] 128 Comp Cas 976) passed in Company Petition No. 63 of 2002, before the Company Law Board, Additional Principal Bench, Chennai. The company petition presented under the provisions of sections 397, 398, 402 and 403 of the Act was by the appellants in Company Appeal No. 8 of 2005 in their capacity as shareholders of the first respondent-company by name Prakash Coach Builders P. Ltd., and impleading six other respondents amongst whom respondents Nos. 2, 4, 5 and 6 to the company petition were also shareholders while respondents Nos. 3 and 7 were not shareholders and therefore outsiders to the company. Respondents Nos. 3 and 7 though are not shareholders in the company had nevertheless been taken as directors of the company and it was in this capacity they had been arraigned as respondents to the company petition.

2. The further particulars as pleaded in the company petition presented before the Company Law Board are as under:

“I. Particulars of the company:

The petitioners are shareholders of the first respondent-company (hereinafter referred to as ‘the company’). The company was incorporated on June 26, 1982. Its registered office is situated at 7th Milestone, Tumkur Road, Peenya, Bangalore-560 058.

The authorised share capital of the company is Rs. 5,00,000 (rupees five lakhs) divided into 5000 (five thousand) equity shares of Rs. 100 (rupees one hundred only) each. The paid-up share capital of the company is Rs. 800 (rupees eight hundred) comprising of 8 (eight) equity shares of Rs. 100 (rupees one hundred) each fully paid. Each of the petitioners hold one paid-up share. The other four shares are held by respondents Nos. 2, 4, 5 and 6. The company has never issued share certificates to any of the shareholders.

The main object of the company is to carry on, the business of bus body building, coach building and other allied activities. The present business of the company is also bus body building. The company has its factory in a premise which has been leased to it by Narang Charitable Trust, which is a public charitable trust The factory is situated in property measuring approximately 1,00,000 (one lakh) sq. ft., in a prime industrial area abutting Pune-Bangalore National Highway in the Industrial Suburb of Peenya, on the outskirts of Bangalore. The company has constructed some buildings on the leased land. The company is paying a nominal rent for the leased land and buildings.

Though, in form, the first respondent-company is incorporated under the Companies Act, in substance it is a quasi partnership which was functioning on the basis of mutual trust and confidence just as in the case of a partnership and the relationship between the parties was that as partners with all the male members taking an active role in the management and administration of the company. In fact, the company was incorporated by all the 8 shareholders as promoters, each of them agreeing to subscribe to one share and the 4 male members being the first director of the company. A copy of the memorandum and articles of association of the company is produced herewith and marked as annexure 1.

II. Particulars of petitioners:

The first petitioner's father and the second respondent's father were brothers. The fourth petitioner is the elder sister of second respondent. The 3 other shareholders of the first respondent-company are also closely related to each other. The fifth respondent's elder brother Ashish Manchanda is married to Ms. Uma the eldest sister of the second respondent. The fourth respondent is the wife of the second respondent, the fifth respondent is the nephew of the first petitioner, and the second respondent and the sixth respondent is the wife of the fifth respondent. Respondents Nos. 3 and 7 are outsiders having no shareholding in the company. The company's directors are respondents Nos. 2, 3 and 7. A copy of the latest audited balance-sheet of the first respondent-company as at March 31, 2002, is produced as annexure 2.

There is no dispute about the above shareholding pattern of the company. The annual return filed by the company with the Registrar of Companies signed by respondents Nos. 2 and 4 consistently indicates this position. A copy of one such annual return made up to December 30, 1987, is produced herewith and marked as annexure 3. The said annual return also indicates the names of the directors.

The petitioners and respondents Nos. 2, 4, 5 and 6 were the owners who were managing the company in an harmonious manner for about 7 to 8 years. There were no differences during that time. All decisions were taken by the board of directors unanimously. In all general body meetings, resolutions were passed unanimously. At that time there was harmony in the company.

III. Particulars of the respondents:

The first respondent is the company in respect of the affairs of which this petition has been filed. Respondents Nos. 2, 3 and 7 are directors of the first respondent. Respondents Nos. 3 and 7 are outsiders having no shares in the company. Respondents Nos. 2, 4, 5 and 6 hold one share each in the first respondent-company.”

3. The company petitioners had approached the Company Law Board for relief complaining of oppression and mismanagement on the part of the respondents and had for such purpose pleaded a series of developments not only with regard to the manner of management of the first respondent-company but also of its sister concerns such as Prakash Roadlines Ltd., Prakash Leasing Ltd., and had narrated the rivalry and squabbles that developed amongst the parties to the petition in the wake of passing away of some of the kith and kin, particularly, as petitioners and respondents are close relatives and belonging to the families which had close relationship with each other. It is also pleaded that the first respondent-company had taken control of another company by name M/s. S.M Kannappa Automobiles P. Ltd., which had, for its main purpose and object, the activity of body building in respect of luxury buses.

4. It had been pleaded that there were disputes amongst the parties even in the context of the acquisition of shares in the said company, namely, M/s. S.M Kannappa Automobiles P. Ltd., and some of the parties had approached the Company Law Board for relief seeking for rectification of the register of members of the said company and with such developments taking place the differences amongst the parties escalated and quite naturally had its impact on the manner of management of the affairs of the first respondent-company also and the main allegation for the purpose of this appeal and presentation of the company petition before the Company Law Board was that the shareholders-respondents of the first respondent-company had acted in a manner to abuse their powers in the management of the company to act unevenly in the matter of distribution of additional shares amongst the members of the company.

5. The main grievance of the petitioners before the Company Law Board was that while the first respondent-company which was required to issue additional shares in favour of its members to ensure compliance with the requirements of section 313 of the Act, namely, to retain its character as a private company by having a minimum paid-up capital of rupees One lakh in the wake of the amendment to the Companies Act by the Companies (Second Amendment) Act, 2002, with effect from April 1/2003 and with the paid-up capital of the company in favour of eight shareholders was only one share each of the face value of Rs. 100 whereas the authorised capital of the company was rupees five lakhs to be spread over five thousand equity shares of face value of rupees hundred as per letter dated November 11, 2002, with the signature of Sri C.K Narottam (figured as third respondent in the company petition) offering existing shares to the members at a premium of Rs. 140 per share and inviting the remittance from the interested members desirous of subscribing to additional shares by remitting the amount on or before November 30, 2002.

6. It was the version of the company petitioners that though they categorically offered to take additional shares and that the further version that the letter of offer never indicated the entitlement of each of the shareholders, the petitioners had nevertheless pointed out the attempt on the part of the company and the persons in charge of the management of the company, was nothing short of an act of oppression and an illegal act and being in the line of fire of such oppressive manner of functioning of the respondents, not only by the first respondent-company, but also in respect of other sister concerns wherein also some of the respondents were in control and the further allegation that the second and third respondents in particular, had always acted in a manner deleterious to the interest of other members and to virtually oust the other shareholders of the companies for improving their own position, etc. The cause of action for approaching the Company Law Board was pleaded to be the manner of allotment of the proposed additional shares decided in the board meeting of the company held on December 13, 2002, by allotting 1,500 numbers each of equity shares in favour of the second and third respondents to the company petition while no shares were allotted to the members of the company.

7. It was the version of the petitioners that they had aspired for 624 shares each and had tendered cheque for a sum of Rs. 1,49,760 each representing the value of 624 shares in terms of the price quoted for each share as per the offer letter.

8. It was the version of the petitioners that as the existing share pattern was one share each by each of the member of the company, the offer should be obviously in the same ratio or proportion and the additional number of shares which was offered to the existing members and to make up the short-fall in the subscribed share capital of the company so as to conform with the requirements of section 313 of the Act were also to be distributed equally amongst the existing shareholders and on such understanding had tendered payment for the subscription of additional shares.

9. It was alleged in the company petition that notwithstanding the petitioners' willingness to subscribe to the additional shares and in spite of tendering payment for such subscription, the company had allotted shares only in favour of respondents Nos. 2 and 4 at 1,500 numbers each and more importantly to, the exclusion of the petitioners in getting such additional shares and this had been done by the management of the company with mala fide motive to upset the equilibrium that had been maintained hitherto in the shareholding pattern of the company and with an ulterior motive on the part of respondents Nos. 2 and 4 to rest for themselves the control and management of the company by their superior shareholding in the company, as while respondents Nos. 2 and 4 would thereafter become shareholders with a holding 1,501 shares each, the petitioners in particular, will be languishing with their erstwhile holding of only one share; that bringing about such changes in the shareholding pattern of the company by a design or scheme of respondents, particularly, respondents Nos. 2 and 4 was an act prejudicial not only to the interest of the company, but also to the petitioners; that the uneven manner of allotment of additional shares only in favour of respondents Nos. 2 and 4 constituted an act of oppression, an illegal act and lacking probity and being vitiated by mala fides and on such allegations, the petitioners had approached the Company Law Board seeking the following reliefs:

“(i) declare that the letters dated December 6, 2002, from the first respondent to the petitioners (annexures 14 and 15) are illegal, mala fide and oppressive and quash the same;

(ii) direct the respondents, their servants and agents to allot in favour of the petitioners an equal number of shares of the first respondent-company as the shares to be allotted to respondents Nos. 2, 4, 5 and 6 or their nominees or third party/ies;

(a) declare that the purported allotment of 3,000 shares at the alleged board meeting held on December 13, 2002, to respondents Nos. 2 and 4 is illegal, oppressive and mala fide and set aside the said allotment and consequently order reduction of the paid-up share capital of the first respondent-company by cancelling the allotment of the said 3,000 shares.

(iii) declare that the action of the respondents in keeping petitioners Nos. 1 and 3 out of office as director of the first respondent-company is oppressive and illegal;

(iv) direct amendment of articles of association of the first respondent-company to provide that composition of the board of directors will be equal among the petitioners' group and the second respondents' group and independent third person to be appointed by the Company Law Board shall be the chairman of the board of directors of the first respondent-company;

(v) direct that the board of directors of the first respondent shall not take any decision relating to issue or transfer of shares in a manner which brings about change in the shareholding pattern of the company as it stood on the date of incorporation;

(vi) remove respondents Nos. 2, 3 and 7 from the office of directors of the respondent-company for having indulged in acts of mismanagement and oppression;

(vii) order cancellation/buy-back the shares of the first respondent-company held by respondents Nos. 2, 4, 5 and 6 at their face value by the company

10. The company petitioners invoking the provisions of section 403 of the Companies Act, 1956, had also sought for the following interim prayers:

“(a) stay issue/allotment of any shares by the first respondent-company without prior consent/approval of this hon'ble Board;

(b) stay the exercise of voting rights and grant of corporate benefits on newly allotted shares in the event of any shares having been allotted by the first respondent-company to any person other than the petitioners pursuant to the offer letter dated November 11, 2002;

(c) appoint petitioners Nos. 1 and 3 as directors of the first respondent-company during the pendency of this petition;

(d) direct that no decision shall be taken by the board of directors of the first respondent at a meeting or by circulation without the concurrence of petitioners Nos. 1 and 3; and

(e) direct that no general body meeting shall be convened or held by the first respondent-company without leave of this hon'ble Board to consider the increase in the authorised/issued/paid-up share capital of the company or to amend the articles of association of the company.”

11. We notice from the order-sheet maintained by the Company Law Board that the following interim orders had been passed by the Board during the pendency of the company petition before it:

“Order

Petition mentioned seeking the interim reliefs sought in the petition. Counsel for the respondents opposed the move for granting any interim relief and sought time to file counter, which may be done by January 15, 2003 and rejoinder to be filed by January 25, 2003. In the meanwhile, the respondents will maintain the status quo in regard to the paid capital of the company and any resolution that may be passed will be implemented only with approval of this Bench.

Call on January 28, 2003, at 2.30 p.m

December 26, 2002

Heard counsel for the petitioners and respondents.

Counsel for the respondents submitted that the company made further allotments in the second week of December, 2002.

In view of the facts and circumstances of the case, the following order is made:

(a) The company will not make any further allotment until further orders.

(b) The allottees will not exercise their voting rights in respect of the shares allotted in the second week of December 2002; and

(c) Any resolution that may be passed in any general body meeting will be implemented with prior approval of the Bench.

The above order is passed in supersession of the order dated December 26, 2002.

The respondents will file counter by February 21, 2002 and rejoinder to be filed by March 7, 2003.

The petition will be heard on a date to be notified later.

January 28, 2003.

The respondent will file counter in C.A No. 104 of 2003 by October 31, 2003, upon which orders will passed on the merits in C.A No. 104 of 2003.

The main petition will be heard on December 8, 2003, at 2.30 p.m

October 20, 2003.

1. Considering the facts and circumstances of the case and the averments made in the application as Well as the counter filed by the respondents and also the fact that the legality of the allotments made on December 13, 2002, shall be gone into while considering the company petition on the merits, the application seeking amendment of the company petition is allowed. Accordingly, the petitioners will file amended petition by December 12, 2003 and the respondents are at liberty to file additional counter, if any, by December 22, 2003. The main petition will be heard on January 12, 2004, at 10.30 a.m

2. A copy of the order will be forwarded to counsel on record of both the parties.

December 2, 2003

Heard. Counsel for the petitioners concluding his arguments. In the meanwhile, the petitioners will file amended petition by January 13, 2004 and the respondents are at liberty to file additional counter by January 20, 2004. Adjourned to January 21, 2004, at 2.30 p.m for arguments of counsel for the respondents.

January 12, 2004.

Heard. The respondents have filed additional counter. For arguments of the respondents adjourned to February 16, 2004, at 10.30 a.m

January 28, 2004.

Arguments concluded. Orders reserved. In the meanwhile, to the suggestion made by the Bench earlier for amicable settlement of the disputes, counsel for the respondents submitted that the second respondent is willing to purchase the shares of the petitioners. In response to this offer, counsel for the petitioners expressed that the petitioners are either willing to sell their shares or purchase the shares of the respondents group, depending upon the price offered by the respondents group. However, the parties immediately could not agree to the modalities of arriving at the value of the shares. In these circumstances, both counsel for the petitioners and respondents will interact with each other and explore the possibility of the mode of fixing the price, including the process of sale of shares by bidding which will be reported before the Bench on March 1, 2004, at 2.30 p.m

February 16, 2004.

Heard counsel for both the parties. As the respondents prayed further time to consider the settlement proposal, which has not been objected to by counsel for the petitioners, adjourned to March 11, 2004, at 10.30 a.m

February 25, 2004.

As the settlement proposal failed, orders will be passed on the merits of the company petition.

March 11, 2004.

Order1

The petitioners collectively holding 50 per cent. of the paid-up capital of M/s. Prakash Coach Builders P. Ltd. (‘the company’) and constituting not less than one-tenth of the total number of its members have filed this petition under sections 397, 398, 402 and 403 of the Companies Act, 1956 (‘the Act’) complaining of the allotment of 1,125 shares each in favour of respondents Nos. 2 and 4 in complete exclusion of the petitioners as illegal and oppressive.

2. Shri S.S Naganand, learned senior counsel appearing for the petitioners, while elaborating the background of the company as well as its group companies/entities with a spate of litigations between the parties submitted that the first respondent-company being a private limited company was promoted in June, 1982 by the petitioners and respondents Nos. 2, 4, 5 and 6 being close relatives, with main object of carrying on the business of bus body building coach building and other allied activities. The authorised share capital of the company is Rs. 5,00,000 divided into 5,000 equity shares of Rs. 100 each and the paid-up capital of the company is Rs. 800 comprising of eight equity shares of Rs. 100 each fully paid-up. The petitioners and respondents Nos. 2, 4, 5 and 6 each hold one paid-up share. Learned senior counsel pointed out the parity maintained between the parties ever since incorporation of the company till the impugned allotments in favour of the respondents. Though the first respondent-company has been incorporated under the Act, yet in substance it is a quasi-partnership, functioning on the basis of mutual trust and confidence just as the case of a partnership and the relationship between them is that of partners with all the male members taking an Active role in the management and administration of the company. But the respondents acted unfairly by allotting shares in favour of respondents in exclusion of the petitioners. All the earlier proceedings before the various courts/forums, wherein the second respondent was a party establish the conduct of the respondent. The parties are at loggerheads and there is deadlock, which would lead to winding up of the company, as made out in the company petition, which would prejudicially affect the company and its members. The act of the respondents being prejudicial to the members entitle the petitioners to invoke the provisions of sections 397 and 398. While so, the company by a letter dated November 11, 2002 (annexures 11 and 12 of petition) informed the petitioners that it was to increase the paid-up capital in statutory compliance of the provisions of the Companies Amendment Act, 2000. Furthermore, the company was in need of funds, and therefore, offered to allot shares at a premium of Rs. 140 per share in favour of the existing shareholders and accordingly advised the petitioners to send the remittances on or before November 30, 2002. The respondents did not indicate the need for additional funds beyond rupees one lakh. The company neither forwarded any application nor disclosed the essential factors such as number of shares offered to the petitioners, proposed increase in the paid-up capital; necessity for additional funds; basis for the premium, etc. According to Sri Naganand, learned senior counsel, article 4 of the articles of association of the company ought to have been complied with before the increase of the paid-up capital by passing an ordinary resolution at the general meeting of members of the company. Though the petitioners had by their letter dated November 26, 2002 (annexure 13 of the petition) agreed to take additional shares and forwarded four bank pay orders of Rs. 1,49,760 each, the company had rejected the application of the petitioners on the ground that they did not fulfil the requirements of section 41 of the Act. At the same time the company had allotted on December 13, 2002, 1,125 shares each to respondents Nos. 2 and 4, increasing the paid-up capital beyond the statutory limit, in breach of trust and good faith, which according to learned senior counsel is oppressive and constitutes an act of oppression in the affairs of the company, especially when the petitioners have always been holding equal number of shares in the company as those of the respondents Nos. 3, 4, 5 and 6. Sri Naganand, learned senior counsel pointed out that the directors are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company and ensure fair play in action in corporate management, but failed to act for the benefit of the company and solely for their personal aggrandisement and to the detriment of the company, and, therefore, sought the intervention of the Company Law Board. In this connection, learned counsel referred to decisions in Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179; AIR 1950 SC 172 and Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd., [1984] 55 Comp Cas 160 (Cal). Moreover, the action of the respondents suffers from lack of probity and fair play as evidenced by the impugned allotments made in exclusion of the petitioners' holding 50 per cent. of the paid-up capital of the company, entitling them for the relief claimed in the company petition in support of which reference has been made to Standard Industries Ltd. v. Mafatlal Services Ltd., [1994] 80 Comp Cas 764 (CLB). By virtue of the impugned allotments, there has been changes in the composition of the shareholders, management and control of the first respondent-company. In this connection, learned senior counsel gave a detailed account of similar conduct and attitude adopted by the respondents in gaining control of other group companies/entities and urged that even if the petitioners have not made out any case of oppression, the CLB is empowered to grant reliefs in the interest of the parties as held in the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC). He, therefore, prayed for setting aside the impugned allotments.

3. Shri V. Ramakrishnan, learned counsel appearing for the respondents while contending that the petitioners have not made out any case to show that the affairs of the first respondent-company are being conducted in a manner prejudicial to the public interest or in a manner oppressive to any member or members, satisfying the requirements of sections 397 and 398, every allegation made in relation to the affairs of the concerns other than the first respondent-company is quite relevant for the purpose of the company petition. The petitioners have failed to make out a case for winding up of the company on just and equitable grounds and, therefore, no relief can be granted as held in Hanuman Prasad Bagri v. Bagress Cereals P. Ltd., [2001] 105 Comp Cas 493; (2001) 4 SCC 420. There are no groups between the parties though they are related to each other. There is no question of maintaining parity in shareholding between the parties. Though the petitioners and the respondents each subscribed one share equally among themselves under the memorandum of association of the company, it cannot be presumed that the equal shareholding must be continued till winding up of the company. The first respondent-company is neither in form nor in substance a quasi-partnership and never functioned on the basis of mutual trust and confidence as in the case of partnership. The relationship between the parties are not as that of partners. While the second respondent the only family member is a director, petitioners Nos. 1 and 3 are not directors. The remaining two directors being outsiders are on the board since 1987, thereby the theory of partnership as propounded by the petitioners is negated. The principles of partnership must be applied in the rarest of rare case's as held in Kilpest P. Ltd. v. Shekhar Mehra, [1996] 87 Comp Cas 615 (SC). The petitioners have not been evincing any interest in the affairs or attending the annual general meetings of the company since the year 1995. The third petitioner is carrying on business at Hindpur in competition with the first respondent-company. As there is no parity among the shareholders, it would not result in deadlock and therefore, there is no scope for winding up of the company on just and equitable grounds. By virtue of articles of association of the company the board of directors of the company are within their power to allot shares of the company as they deem fit. According to Shri Ramakrishnan, learned counsel the requirement of an ordinary resolution at the general meeting of members of the company to increase its share capital as contemplated in article 4 does not apply to the increase of its paid-up capital. By virtue of section 3(3), the first respondent-company, being a private company was mandatorily required to increase its paid-up capital from Rs. 800 to Rs. 1 lakh on or before December 12, 2002. Towards this end, the company by a letter dated November 11, 2002, had advised the shareholders including the petitioners inviting them to apply for shares in the company indicating therein the reasons for the proposed increase in share capital, price at which shares are offered to the shareholders and justification for the premium so arrived by the company. Though the petitioners were to apply before November 30, 2002, they had deliberately responded only on November 26, 2002, forwarding four pay orders of Rs. 1,49,760 each and raised certain legal issues. The petitioners had neither asked for the allotment of shares nor indicated number of shares proposed to be subscribed by each of them. As the petitioners failed to comply with the requirements of section 41, the board of directors was unable to allot any shares to the petitioners, Moreover, the company was in receipt of the application of the petitioners just before the last date and therefore, could not advise the petitioners to comply with the requirements before November 30, 2002. Consequently, the company was constrained to return the pay orders, in favour of the petitioners, as resolved at the board meeting held on November 30, 2002. The board of directors at the meeting held on December 13, 2002, after considering the valid applications received from the shareholders had in exercise of their powers allotted 1,125 Shares each in favour of respondents Nos. 2 and 4, thereby increasing the paid-up share capital in compliance with the provisions of section 3(3), which would not constitute an act of oppression. Thus, there is no illegality in the allotment of shares without bringing out any change in the management or control of first respondent-company. Under these circumstances, the allotment is not oppressive, illegal Or lacking in probity. The issue of shares is neither mala ride nor vitiated by malice and therefore, the petitioners are not entitled for any relief as claimed in the company petition.

4. Considering the relationship of the parties, I have suggested to learned counsel to explore the possibilities of any amicable settlement of the dispute, pursuant to which Shri Ramakrishnan, learned counsel expressed the willingness of the respondents to purchase the shares of the petitioners at a value of Rs. 240 per share, which is said to be arrived on the business prospectus of the company as a running concern and without taking into account the lease hold rights in respect of the landed property held by the company. While this proposal was not acceptable to the petitioners, Shri Naganand, learned senior counsel made an offer across the bar to purchase the shares of the respondents at Rs. 480 per shares which was neither acceptable to respondents. Thus the parties could not arrive at any settlement among themselves. I, therefore, shall proceed to consider the pleadings and arguments of learned counsel. The issue that arises for my consideration is whether the allotment of shares impugned in the company petition, made in favour of respondents Nos. 2 and 4 in complete exclusion of the petitioners, would amount to an act of oppression, in the facts and circumstances of the present case. While according to the petitioners, they had subscribed to shares of the company by making the remittances, the respondents contended that the joint application made by the petitioners was not in compliance with the provisions of section 41 of the Act, which reads as under:

‘41. (1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who (agrees in writing) to become a member of a company and whose name is entered in its register of members, shall be a member of the company.

(3) Every person holding equity share capital of company and whose name is entered as beneficial owner in the records of the depository shall be deemed to be a member of the concerned company.’

5. By virtue of section 41(1), a subscriber to the memorandum of a company, becomes ipso facto a member on incorporation. In the case of a subscriber, no application or allotment is necessary to become a member. For any other person to become a member, section 41(2) stipulates two conditions, viz., that there is an agreement to become a member and that his name is entered in the register of members of a company. Section 41(3) is not relevant for the present case. The word ‘in writing’ for ‘agrees’ in sub-section (2) have been added by Amendment Act (65 of 1960) to protect innocent persons from the demands of companies on the verge of going into liquidation, as borne out the suggestion of the Companies Act Amendment Committee. Thus, under this sub-section a person must give his consent in unequivocal terms by applying in writing for allotment of shares. This requirement, in my view, is as regards the first allotment made after the formation of the company. In the case of subsequent allotments to persons who are already shareholders, the procedure prescribed in sub-section (2) does not apply. Even otherwise, assuming for the sake of argument, that the requirement of sub-section (2) of section 41 shall be satisfied in the case of every allotment of shares, the joint application made on November 26, 2002, by the applicants (annexure 13), the relevant portion of which reading as under:

‘Please note that we wish to maintain the present parity of shareholding. The present paid-up share capital of the company is Rs. 800 (rupees eight hundred only), consisting of 8 shares of Rs. 100 each. Our group holds 4 shares and the group of Mr. Bharat Bhushan Narang and Mr. Sudershan Kumar Manchanda hold the balance 4 shares.

Although the number of shares being offered and issued is not stated and also requires the approval of the general body, we are enclosing herewith the below mentioned 4 bank pay orders/cheques of Rs. 1,49,760 (one lakh forty nine thousand seven hundred sixty) each in order to protect our interest. This is without prejudice to our contention that the issue is illegal and mala fide.

Pay Order No. 022943 dated November 26, 2002, drawn on Union Bank of India on account of Vijay Kumar Narang.

Pay Order No. 022944 dated November 26, 2002, drawn on Union Bank of India on account of Neeta Narang.

Cheque No. 706967 dated November 26, 2002, drawn on State Bank of Patiala on account of Geetha Rai.

Cheque No. 856807 dated November 26, 2002, drawn on State Bank of Patiala on account of Bhupinder Rai’.

6. It is required to be examined. It is clear from the above recitals that the petitioners wanted to maintain the parity of shareholding as on the date of application, with the petitioners collectively holding four shares and respondents Nos. 2, 4, 5 and 6 collectively four shares of Rs. 100 each out of the paid-up share capital of Rs. 800 of the company, while allotting shares in favour of the petitioners. It is relevant to observe that the offer letter dated November 11, 2002, made by the company (pages 108 and 109 of petition) is silent about the number of shares offered to the petitioners. Against this background the petitioners had forwarded four pay orders of Rs. 1,49,760 at Rs. 240 per share which is inclusive of premium of Rs. 140 in favour of the company representing the 50 per cent. of the unsubscribed capital of Rs. 5 lakhs of the company. In this context the minutes of the meeting of the board of directors held on November 30, 2002 (pages 40 and 41 of counter-statement) assume relevance, from which it is quite clear that the directors were consciously aware of the fact that each of the petitioners had applied for 624 shares at the rate of Rs. 240 per share and, accordingly, each remitted Rs. 1,49,760 accounting for 50 per cent. of the unsubscribed capital of the company. The sequence of events clearly indicate that the petitioners gave their consent by applying in writing for allotment of the 50 per cent. of the unsubscribed capital of the company amounting to 624 shares for each of the petitioners and, accordingly, every petitioner remitted the requisite amount, which was within the knowledge of the directors of the company. The rejection of the application of the petitioners by the board of directors oh account of non-fulfilment of the requirement of section 41 is misconceived, more so when the petitioners by a letter dated December 10, 2002 (annexure 16 at page 113 of petition) called upon the third respondent to furnish details of the requirement to be complied with by them and further cautioned that any allotment in favour of the other shareholders or third parties, excluding the petitioners would be illegal. In spite of the categorical statement of the petitioners, expressing their readiness to comply with the requirement, the directors of the company at the meeting held on December 13, 2002, had allotted the impugned shares in favour of respondents Nos. 2 and 4 in complete exclusion of the petitioners, thereby increasing the paid-up capital to Rs. 2.25 lakhs, without assigning any justification for such additional funds, in breach of their fiduciary obligations and trust towards the company and its shareholders, which would constitute an act of oppression in the affairs of the company against the petitioners, warranting winding up of the company on just and equitable grounds. Moreover, by virtue of the impugned allotments, the parity of shareholding between the parties maintained since the inception of the company is found to be disturbed. Had there not been any parity of shareholding as contended by the respondents, they would not have at all offered shares to the petitioners. Moreover, when the petitioners by their letter dated November 26, 2002 (page 110 of company petition) had insisted the third respondent to maintain the present parity of shareholding there was no denial of any such parity of shareholding between the parties. Therefore, the plea of the respondents that there was no parity of shareholding must fail. Even though, in Kilpest P. Ltd. v. Shekhar Mehra, [1996] 87 Comp Cas 615, the apex court held that only in rare cases the principles of partnership should be applied, the court has not completely barred application of the principles of partnership to a company and the principles of partnership cannot liberally be invoked. Therefore, the action of the respondents suffers from lack of probity and fair play to maintain the parity of shareholding between the parties. The directors are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the company, but, in my view, acted to the detriment of the company, warranting interference of the Company Law Board as held in Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179; AIR 1950 SC 172 and Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd., [1984] 55 Comp Cas 160 (Cal). The petitioners have complained that the provisions of article 4 have not been complied with. Even assuming it is so, since the company has been benefited by increase in the share capital, I do not consider that any finding needs to be given on this allegation. Under these circumstances, the act of the board of directors of the company, in having rejected the applications of the petitioners is no way justifiable. Accordingly, the following order is made:

(a) The second respondent would transfer out of his holding 281 shares each in favour of petitioners Nos. 1 and 2 within 15 days of receipt of the consideration at the rate of Rs. 240 per share from them and deliver the original share certificates and the instruments of transfer in favour of petitioners Nos. 1 and 2;

(b) The fourth respondent would transfer out of her holding 282 shares in favour of the third petitioner and 281 sharers in favour of the fourth petitioner within 15 days of receipt of the consideration from them at the rate of Rs. 240 per share and deliver the original share certificates together with the instruments of transfer in favour of petitioners Nos. 3 and 4;

(c) The company will register the transfer of shares in favour of the petitioners within 30 days of due lodgement of the share certificates and the instrument of transfer by the petitioners; and

(d) The resolutions passed at the annual general meeting held on December 26, 2003, will become effective as and when the transfers are registered in favour of the petitioners in terms of this order.

7. With the above directions, the petition and the application in C.A No. 7 of 2004 seeking to implement the resolutions passed at the annual general meeting held on December 26, 2003, are disposed, however, without any order as to costs.

April 7, 2004.”

and the petition having been disposed of in terms of the impugned order dated April 7, 2004, granting partial relief to the petitioners, the present appeals, both by the petitioners and the respondents in the company petition, as noticed in the earlier part of this order.

12. The company petition had been resisted by the respondents by filing a common counter statement dated March 27, 2003.

13. The respondents contended, inter alia, that the petition was not tenable in terms of the provisions of sections 397 and 398 of the Companies Act; that it does not necessarily indicate any act of either oppression or mismanagement, within the scope of the statutory provisions and that substantial part of the averments in the petition were irrelevant as it related to other companies, but not to the first respondent-company and that reference to other litigation was of no consequence in the context of the relief sought for in the company petition; that the first respondent-company is a profit making efficiently managed company, as indicated by the facts and figures revealed in the annual report of the company, copy of which had been placed before the Company Law Board by the company petitioners themselves; that it had made profits and had resolved to extend Rs. 5.76 lakhs as on December 31, 2002 and had a meagre paid-up capital of Rs. 800 with the profits compared very well to the investment made by the shareholders, that the petition while lacked averments of a situation to constitute an allegation of oppression or mismanagement in terms of sections 397 and 398 of the Act, on the other hand, was more out of spite and animosity against the respondents, that it was a Clear case of personal vendetta aired by the petitioners, than for seeking any relief in respect of any genuine corporate grievance and it was indicated that the then existing issued and paid-up capital of the first respondent-company was Rs. 2,25,800 divided into 2,258 equity shares of Rs. 100 each and the said shares had been allotted at a board meeting of the company held on December 13, 2002, prior to the presentation of the company petition; that the opinion in this regard had been placed before the Registrar of Companies, Karnataka and that all averments contrary to the admitted position were all denied by the respondents; that the relationship between the parties is purely governed by the provisions of the Companies Act, rather than any other relationship including the blood relationship, which has nothing to do with the relief sought for by the petitioners in the company petition; that the petitioners were not in management of the company for the past several years and it is only the respondents who were managing the affairs of the company; that the respondents were in no way responsible for the spate of the incidents referred to in the company petition against certain averments made about the developments in the context of the M/s. S.M Kannappa Automobiles P. Ltd., were not either correct or relevant and such allegations were denied by the respondents; that the first respondent-company which was earlier incurring losses had been converted into a profit making company by the efficient management of respondents Nos. 2, 3, 4 and 7, etc.; that respondents Nos. 3 and 4 were independent professional directors and were not henchmen or hirelings of respondents as alleged in the petition and the petitioners, in fact, had never objected to the presence of these persons on the board of management of the company and none of the allegations made against the directors of the company are true; that there was never any scheme or design on the part of the respondents either to keep out the petitioners or others from the first respondent-company or other sister concern companies where the parties were members or shareholders; that there was never any arrangement or agreement, amongst the shareholders or between the groups as alleged in the petition; that there was never any concept in the Company Law, quoted at any point of time as visualised amongst the parties particularly, all of them being close relatives would not fall into different groups; that the company was a homogenous one and formed with a paltry investment of Rs. 800 and with each member subscribing to just one share and had carried on its business activities and had prospered and; that the directors were well within their rights and competent to allot additional shares in their entire discretion, but notwithstanding had, in fact, to be fair to all the shareholders, decided to offer subscription to additional shares to all members; that the petitioners had been given a chance to increase their shares in the company and letters to this effect had been sent to all members; that the increase in the subscribed share capital being inevitable in the wake of the statutory changes in law, attributing motives to the respondents in their effort to measure up to the requirements of law is nothing short of false and mischievous allegations and petitioners instead of appreciating the spirit of fairness and cordiality exhibited by the respondents have totally resorted to negative tactics and have virtually by perverse misinterpretation of law all over, have sought to project the respondents in poor light; that the petitioners did not respond to the letter of offer at the earliest, but have had chosen to procrastinate over the matter by resorting to watch and wait tactics; that instead of responding to the offer had unnecessarily sent a reply making allegations and legal issues against the respondents; that the enclosure of pay order of Rs. 1,49,760 without a response for seeking allotment and without indicating the number of shares the petitioners were willing to subscribe, was an act without bona fides; that the petitioners did not comply with the requirements of section 41 of the Act; that it was the petitioners' own making which prevented the board of directors from allotting any shares in their favour and as the management in the company was required to meet the statutory stipulation and in response to the applications received from respondents Nos. 2 and 4 applying for 1,500 shares each, the Board after deliberations, had decided to allot 1,125 numbers of shares each in favour of the second and fourth respondents and thus the paid-up capital of the company had been increased to meet the requirements of section 3 of the Act. The respondents denied that such an act amounted to either oppression or illegal or an act of mismanagement; that the petition did not contain any worthwhile averment to elicit relief in terms of the prayer; that the petitioners were not entitled to equal reliefs sought for in law; that the petition only deserved to be dismissed and prayed accordingly.

14. It is in the wake of such pleadings, the Company Law Board had examined the pleadings, the material placed before it and the submissions made by learned counsel who had appeared for the parties and had passed the impugned order.

15. The Company Law Board has, under the order, being of the opinion that the parties were required to maintain parity of shareholdings as on the date of application and that the petitioners collectively holding four shares and respondents Nos. 2, 4, 5 and 6 collectively holding like number of shares of Rs. 100 each, constituting the paid-up capital of Rs. 800 and in the wake of the letter of offer being silent about the number of shares that were offered to each of the shareholders, but nevertheless, the petitioners having responded by forwarding four pay orders for Rs. 1,49,760 representing Rs. 240 per share, inclusive of premium of Rs. 40 which is sufficient and to elicit, the petitioners put together 15 per cent. of the unsubscribed share capital of Rs. 5 lakhs of the company and that amounting to the petitioners having consented for the allotment of this number of shares in their favour and having tendered equivalent value, the company was required to allot these shares and quoting non-compliance with the requirement of section 41 was only a pretext to illegally deprive the petitioners of their legitimate entitlement for being allotted the number of shares which they had aspired for and in spite of the petitioners having their expressed willingness to comply with the requirement of law, the board of directors in its meeting held on December 13, 2002, ignoring the offers of the petitioners and proceeding to allot shares in favour of respondents Nos. 2 and 4 only to the company petition, to the exclusion of the petitioners and increasing the paid-up capital of the company to Rs. 2.25 lakhs, without assigning any justification for such additional funds was nothing short of failing in their fiduciary obligation and trust towards the company and its shareholders; that such conduct did amount to an act of oppression warranting winding up of the company which is just and equitable, and the action in particular of seeking to disturb the equilibrium which had been maintained in the shareholding pattern of the company by its shareholders, namely, in equal proportion and one share by each of the shareholders and that being sought to be disturbed for the first time by the resolution of the board of management resolved on December 13, 2002 and by the uneven manner of allotment of shares, equally gave cause to the petitioners to seek relief before the Board and on such rationale, the Company Law Board passed orders on the petition in the following manner to grant relief in favour of the company (page 985 of 128 Comp Cas):

“(a) The second respondent would transfer out of his holding 281 shares each in favour of petitioners Nos. 1 and 2 within 15 days of receipt of the consideration at the rate of Rs. 240 per share from them and deliver the original share certificates and the instruments of transfer in favour of petitioners Nos. 1 and 2.

(b) The fourth respondent would transfer out of her holding 282 shares in favour of the third petitioner and 281 shares in favour of the fourth petitioner within 15 days of receipt of the consideration from them at the rate of Rs. 240 per share and deliver the original share certificates together with the instruments of transfer in favour of petitioners Nos. 3 and 4.

(c) The company will register the transfer of shares in favour of the petitioners within 30 days of due lodgment of the share certificates and the instrument of transfer by the petitioners; and

(d) The resolutions passed at the annual general meeting held on December 26, 2003, will become effective as and when the transfers are registered in favour of the petitioners in terms of this order.”

16. It is in respect of this order, the petitioners are in appeal in one set of appeal in Company Appeal No. 8 of 2002, while the original respondents are in appeal in two sets of appeals in Company Appeals Nos. 18 of 2005 and 16 of 2005.

17. While the petitioners who were in appeal in Company Appeal No. 8 of 2005 are before this court to improve their position and to get further relief before this court on the premise that the Company Law Board has unjustifiably deprived the petitioners of such reliefs. The company and the other shareholders and directors are also in appeal in two sets of appeals contending that the Company Law Board in passing the impugned order has committed an act of illegality and a grave error in law, in partially allowing the company petition; that the company petition should have been dismissed in limine in total; that the petitioners before the Company Law Board did not deserve any relief at all, there was absolutely no merit in the company petition; that the Company Law Board has totally misunderstood the scope of the provisions of sections 397 and 398 of the Act; that the understanding of the Company Law Board is clearly in the teeth of the law laid down and declared as per a number of weighty authorities of the Supreme Court dealing with the statutory provisions of sections 397 and 398 of the Act and the order of the Company Law Board is not at all tenable in law; has to be set aside and the company petition dismissed by allowing their appeals.

18. In such circumstances, we have heard all the three appeals together over a considerable length of time and with Shri Naganand, learned senior counsel appearing for the appellants in Company Appeal No. 8 of 2005 and respondents in Company Appeal No. 18 of 2005 and Company Appeal No. 16 of 2005 and Sri Dhyan Chinnappa, learned counsel appearing for the appellants in Company Appeals Nos. 16 and 18 of 2005 concluded his elaborate arguments on October 15, 2009 and having regard to the dose relationship of the parties and as it was felt that an amicable settlement of the disputes among the parties was a more desirable thing than the judicial determination of the differences, the matter was adjourned without proceeding for judgment to enable the parties to explore the possibility for an amicable settlement and to report by October 20, 2009.

19. Though the matter was thereafter listed on October 21, 2009, while certain memos were filed without consensus amongst the parties for any settlement, it was again directed to be listed on October 28, 2009, on which day the following order had been passed:

“D.V.S.K.J and L.N.S.J:

October 28, 2009

In the wake of request to the parties to explore the possibilities of an amicable settlement of the disputes amongst them and time having been given to the parties to report any amicable settlement if had been arrived at, the outcome as we noticed was that no such thing was forthcoming but as we again goaded the parties to still explore the possibilities of settlement, a memo was filed on behalf of the appellant in Company Appeal No. 8 of 2005 and respondents in Company Appeals Nos. 16 and 18 of 2005 to the following effect:

‘Without prejudice to the contentions in the aforesaid appeals, the appellants are agreeable for an order being made by the hon'ble court directing that the paid-up share capital of the first respondent-company be held equally by all the original 8 shareholders.’

As this memo was one sided, there being no possibility of a settlement and to at least understand the area of difference amongst the parties and to ascertain if the void can be filled up by our persuasion or otherwise, the respondents in Company Appeal No. 8 of 2005 and appellant in Company Appeals Nos. 16 and 18 of 2005 were asked to indicate their say in writing to the court through another memo.

We have received the memo filed on behalf of respondents Nos. 1, 2 and 4 in Company Appeal No. 8 of 2005 who also happen to be appellant in Company Appeals Nos. 16 and 18 of 2005 and submission of Sri Dhyan Chinnappa, learned counsel for these parties is that even now there is no possibility of a settlement and the only possible response on the part of his clients is one of making an offer to purchase the shareholdings of the appellants at a fair price.

These two memos even when read together leaves more areas and fresh grounds for disputes and litigation rather than attempting to bring about an amicable settlement.

It is obvious to us that the parties are in no mood to settle the matter by themselves and are more keen to have decision from the court.

List for further hearing on November 9, 2009.”

20. Though the matter is listed for further hearing we having heard learned counsel for the parties elaborately and on all the aspects of the matter, learned counsels having made submissions, no further hearing was necessary and accordingly, we have proceeded to dictate the judgment opining as under.

21. Appearing on behalf of the company and the shareholders and others in the management of the affairs in the Company Appeal No. 18 of 2005 which is by the company and its two directors, Mr. Narotam was a director at that time and the appellants in the Company Appeal No. 16 of 2005 by Mr. Bharat Bhushan Narang and Smt. Chitra Narang two members of the company in whose favour the additional shares have been allotted, Mr. Dhyan Chinnappa, learned counsel has very vehemently contended that the respondents in these appeals, the company petitioners in particular were not entitled for any relief at all before the Company Law Board, that the Company Law Board has totally missed the legal issues involved in the context of the petition under sections 397 and 398 read with sections 402 and 403 of the Act. That the company petition should have been dismissed in limine, that the two appeals, namely, Company Appeals Nos. 16 and 18 are to be allowed and the order of the Company Law Board set aside and the company petition should be dismissed and consequently Company Appeal No. 8 of 2005 should automatically be dismissed, that the appellants in Company Appeal No. 8 of 2005 are not entitled for any further relief as claimed, but in fact, are not even entitled to sustain the relief that had been granted by the Company Law Board under the impugned order and has prayed for disposing of the appeals in the manner as submitted.

22. Mr. Chinnappa, learned counsel has taken us through the factual details particularly the sequence of events as it developed starting from the letter of offer dated November 11, 2002, which was sent by the company to its shareholders. Reply of the company petitioners in their letter dated November 26, 2002, in response to the letter dated December 6, 2002, the rejoinder by the petitioners in their communication dated December 10, 2002, the decision of the board of directors on December 13, 2002 resolving to allot 1,125 shares in favour of respondent No. 2 and like number in favour of respondent No. 3, the appellants in Company Appeal No. 16 of 2005 and the affidavit of the company petitioners before the. Company Law Board by the company petitioners in Appeal No. 20 of 2005 and on such reference submitted that the developments as revealed from the sequence of events would never constitute ground for presenting a petition under sections 397 and 398, that a solitary act of allotting shares in the manner as per the resolution of the company dated December 13, 2002, can never be elevated to a situation of an act of oppression On the part of the persons in management of the affairs of the company, that it is well-settled that single and solitary act would not amount to an act of oppression, that it does not qualify for relief under section 397 of the Act, that the company petitioners had never made good the requirements of section 397 and the company petition before the Company Law Board for seeking relief, that the argument of not understanding the agreement between the shareholders to maintain parity while is disputed on facts, assuming it to be so for argument sake and without conceding it is pointed out that it is of no consequence on the affairs of the company, that an inter se arrangement amongst the shareholders is not one that can bind the company, that the company is governed and regulated in its functions and transaction of business only by the articles of association of the company, that even in law no shareholder of a private limited company has a right to claim parity with other members of the company, that any shareholder cannot even claim as a matter of right to be allotted the same number of shares as are allotted in favour of any other members, that allotment of shares in a private company is in the entire discretion of its board of directors, even as recognised by statute in section 81 of the Act, that even the petition averments never made out a case of continued and sustained action of oppression and if at all made out a case of single and solitary existence of non-allotment of shares to the petitioners, whereas all the shares on the increase of subscribed capital were allotted only in favour of the appellants in Company Appeal No. 16 of 2005, that such allotment, even if it is found to be not in accordance with law, cannot constitute an act of oppression either and that the petition not making any case of statutory violation and petition averments being more in the form of a narration of many irrelevant instances and development not related to the company itself, none of the prayers sought for could have been granted in favour of the petitioners on such pleadings and supporting material and in support of the submissions learned counsel has placed reliance on the following authorities:

(i) Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 35 Comp Cas 351; AIR 1965 SC 1535.

(ii) M.S.D.C Radharamanan v. M.S.D Chandrasekara Raja, [2008] 143 Comp Cas 97; (2008) 6 SCC 750.

(iii) Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743; (1981) 3 SCC 333.

(iv) Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, [2005] 123 Comp Cas 566; (2005) 11 SCC 314.

(v) Hanuman Prasad Bagri v. Bagress Cereals P. Ltd., [2001] 105 Comp Cas 493; (2001) 4 SCC 420 : AIR 2001 SC 1416.

(vi) V.B Rangaraj v. V.B Gopalakrishnan, [1992] 73 Comp Cas 201; (1992) 1 SCC 160 : AIR 1992 SC 453.

(vii) Nanalal Zaver v. Bombay Life Assurance Co. Ltd., [1950] 20 Comp Cas 179; AIR 1950 SC 172.

23. Though Sri Naganand, learned senior counsel had opened the case and had made submissions on behalf of the appellant in Company Appeal No. 8 of 2005 in the first instance, we have noticed the submissions made by Mr. Dhyan Chinnappa, as the scope for examination of the appeals is much greater in these two appeals, particularly as the appellants in these two appeals (Company Appeals Nos. 16 and 18 of 2005) had sought for dismissal of the company petition itself and if this could happen, the further examination of the merits and submissions made in Company Appeal No. 8 of 2005 would have obviously been avoided as Company Appeal No. 8 of 2005 is only to seek reliefs over and above what had been granted by the Company Law Board in terms of the impugned order.

24. However, Sri Naganand, learned senior counsel has defended the order of the Company Law Board by submitting that the order passed by the Company Law Board was not at all enough in the facts and circumstances of the case but was still required to be improved upon in terms of the prayer sought for by the company petitioners, that the powers conferred on the Company Law Board for granting the relief under sections 397 and 398 are very wide, that such is the legal position in terms of the provisions of sections 402 and 403 of the Act which read as under:

“402. Without prejudice to the generality of the powers of the Tribunal under section 397 or 398, any order under either section may provide for—

(a) the regulation of the conduct of the company's affairs in future;

(b) the purchase of the shares or interests of any members of the company by other members thereof or by the company;

(c) in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

(d) the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other, namely:—

(i) the managing director,

(ii) any other director, …

(iv) the manager,

upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable in all the circumstances of the case;

(e) the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;

(f) the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application under section 397 or 398, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

(g) any other matter for which in the opinion of the Tribunal it is just and equitable that provision should be made.

403. Interim order by Tribunal.—Pending the making by it of a final order under section 397 or 398, as the case may be, the Tribunal may, on the application of any party to the proceeding make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable.”

25. It is submitted that the company petitioners were entitled for relief in total and undoubtedly to the extent granted by the Company Law Board as the manner in which the persons in management of the company had acted in the discriminatory manner of allotment of shares by choosing only two of the shareholders for patronising and keeping out the other shareholders, particularly in denying the petitioners from getting any allotment in their favour was a dear misuse and abuse of the powers vested in the management; that the power was not exerdsed in a proper and a bona fide manner and for the efficient management of the company, but in a vindictive manner to deprive the company petitioners of their normal allotment of shares, to reduce them to a position of non-entity in the company, that the mala fide exercise of power vested in the board of management is writ large in the action of the company, particularly in terms of the resolution dated December 13, 2002, that this resolution cannot be termed as a solitary act of oppression but is preceded by serious acts of omissions and commissions, some of which, though in the context of manner of managing the sister concerns of the respondent-company and the shareholders who were the beneficiaries of the resolution dated December 13, 2002 and board of management; that too constitutes an act of oppression, it is not necessary for the complainant-petitioners to demonstrate the existence of any illegality or violation of the statutory provisions; that the relief as granted by the Company Law Board is really not of any avail or benefit to the company petitioner but having been kept out of the management of the affairs of the company and not having allotted the necessary shares in favour of the company petitioners at a point of time, when the assets of the company which are the assets with reference to the shareholders and should have been evenly distributed amongst the 8 shareholders and each shareholder in the company should have been fairly and evenly treated and the assets of the company should have been sought to be apportioned, evenly but on the other hand the most discriminatory manner of the allotment of shares only in favour of five shareholders while could enable these shareholders to reap the profits and benefits which the company can make by claiming commensurate dividend on such number of shares, the company petitioners were left high and dry and left to maintain one share each and this was nothing but an act to deprive the company petitioners of their legitimate entitlement to share, the profits of the company; that such acts while clearly constitute acts of oppression warranting relief, has further submitted that the Company Law Board has not fully appreciated the manner of granting relief to shareholders complaining of act of oppression in terms of section 397 and as contemplated under section 402, that the Company Law Board was entitled to mould the relief so that the relief granted to the company petitioners was an effective relief that they can really enjoy and not merely a relief on paper which could never translate into action or reality; that even when the Company Law Board has been fully enabled to effectuate the relief granted on a petition under sections 397 and 398, the Company Law Board has not realised the real purpose and scope of section 402 and has not moulded the relief in a manner productive to the company petitioners and therefore, the order passed by the Company Law Board in so far as granting of relief requires suitable modifications so that the company petitioners can really get the relief to which they are entitled to as otherwise, a relief which could be realised for their advantage and benefit and will be lost to them for even in support of such submissions Mr. Naganand has placed reliance on the following authorities:

(a) M.S.D.C Radharamanan v. M.S.D Chandrasekara Raja, [2008] 143 Comp Cas 97; (2008) 6 SCC 750.

(b) Dale and Carrington Invt. P. Ltd: v. P.K Prathapan, [2004] 122 Comp Cas 161; (2005) 1 SCC 212 : AIR 2005 SC 1624.

26. Drawing attention particularly to the manner of bias and mala fide way of allotment of shares by a managing director for his own benefit, that the directors of the company are in the position of agents or trustees or representatives and they act on behalf of company arid in a fiduciary capacity and their acts and deeds are always to the benefit of the company, that therefore virtually they are trustees for the shareholders and who function within the limits of the memorandum Of association arid articles of association of the company, that particularly in the matter of issue of additional shares should make allotment for proper purpose, and such duty they owe to all shareholders of the company; that provisions of section 81 of the Act regulates the raising of further capital and issue of shares by a company; that the directors are nevertheless required to make a true and proper disclosure of the purpose for which additional shares are issued, manner in which they are issued, number of shares that are sought to be issued and proportionate shares are sought to be issued, etc. That such are the requirements on the part of the directors because of the fiduciary nature of the position of the shareholders and the manner of conduct of the directors in a private limited company is put to test on a very fine scale to determine as to whether the powers vested in them are properly used, not in any way misused or even for collateral considerations of favouring a few and spite others; that the provisions of section 81 does not operate in respect of private limited company, that the greater responsibility and duty to act fairly and wisely is on the directors and in the present case it being so, necessarily implies that the directors are not as free to exercise their discretion in the manner of allotment of equity shares for raising additional capital for the company and therefore submits that the act of allotting 2,250 number of shares in favour of two shareholders is clearly and undoubtedly even a statutory violation apart from being an act of oppression and to further buttress his arguments, has placed reliance on the decision of Supreme Court in the case of Pearson Education Inc. v. Prentice Hall India P. Ltd. (Single Bench decision of the Delhi High Court reported in) [2006] 134 DLT 450; [2007] 136 Comp Cas 294, by relying and laying emphasis on paragraphs 16 and 17 which has followed the judgment of the Supreme Court in Dale and Carrington Invt. P. Ltd. v. P.K Prathapan, [2004] 122 Comp Cas 161; (2005) 1 SCC 212, which by itself referred to English decision in the case of Clemens v. Clemens Bros Ltd. reported in [1976] 2 All ER 268 (Ch. D), to submit that a conduct and association of the nature in terms of the resolution of the company passed on December 13, 2002, clearly amounted to an act of oppression and therefore submitted that the petitioners had made out a clear case of oppression in the facts and circumstances of the case and the Company Law Board was fully justified in granting relief but has only stopped short of a proper and effective relief and the order of the Company Law Board needs to be corrected by this court issuing necessary directions in this appeal.

27. It is significant to notice that in the case of Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad, [2005] 123 Comp Cas 566; (2005) 11 SCC 314, while it makes a reference to its earlier decision in Dale and Carrington Invt. P. Ltd. v. P.K Prathapan, [2004] 122 Comp Cas 161; (2005) 1 SCC 212, and having not in any way disapproved by the earlier view taken in Dale and Carrington Invt. P. Ltd. v. P.K Prathapan, [2004] 122 Comp Cas 161; (2005) 1 SCC 212, to submit that even when there is justification for issue of additional shares, that by itself is not an end of the examination of the manner of allotment of such additional shares is also a test for examining the extent of acts of oppression and would submit that in the light of the view expressed by the decisions relied upon on behalf of the company petitioners there was a dear case of oppression by the management of the majority shareholders of the company was made out and therefore the relief was very much justified.

28. We have perused the records, examined the order of the Company Law Board, perused the impugned order of the Company Law Board, looked into the pleadings in the present appeals and considered the submissions made at the Bar and the good number of authorities relied on by the respective counsels.

29. Sections 397 and 398 of the Companies Act have been a fertile ground for litigation amongst the warring groups and shareholders in a company, particularly as human nature is to comer as much benefits as is possible for oneself and even at the cost of the neighbour, the fellow passengers and the co-shareholders.

30. Fairness and proper management is not necessarily a favoured phenomenon, but bitter acrimony, mud slinging subversive acts are all part of corporate management Gaining control of the company at the cost of other shareholders becomes the sole aim and those who are already in control want to consolidate their power and position further so that their regime is not threatened to end abruptly but is perpetuated. Brothers turn enemies, relatives forget their relationship and start fighting one another, cordiality turns to rivalry, bitterness, acrimony, can even lead to violence some times. The persons accustomed to power are loath to give up their power and on the other hand want to perpetuate it. But in nature even a worm retorts when cornered and when it comes to a question of survival, even the weak and meek muster courage.

31. The Companies Act is a codified piece of corporate legislation to regulate the conduct of companies registered in this country and to provide ways and means and solutions to problems which may crop up in the course of corporate management. When things are examined from bare facts and from the angle of a layperson or a common man, the answers appear to be straight forward, simple and many a times inevitable. But when questions and disputes are examined within legal parameter, on the touch stone of the corporate laws, judicial pronouncements the experience is that inevitably things get complicated, what was clear becomes hazy, solutions elude and possible amicable settlements never happen! That is, precisely what has happened in the present situation also.

32. What could have been amicable and satisfactory resolution by a reasonable fair conduct and action as on the other hand, set in a bitter feud amongst the parties before all forums of dispute resolution, courts and non courts, Company Law Board, arbitrators etc., etc. The simple complaint of the company petitioners bereft of all other aspects can be understood with when the company which was required to enhance its subscribed capital from a meager Rs. 800 represented by 8 equity shares of 100 face value of Rs. 1 lakh if it is a private company and Rs. 5 lakhs if it is a public limited company spread over 1,000 or 5,000 as the case may be and by allotting such additional shares in favour of the members of the company who are willing to subscribe to the additional shares and could have been very satisfactorily resolved if all the shareholders should have been given a fair opportunity for subscribing an uniform number of shares that is, by distributing the additional shares in an equitable manner amongst all the shareholders and if some are not willing to subscribe, by adding that to the company account and distributing that also in an uniform manner amongst the willing members, has on the other hand tamed out to be arena for legal battle as the company in terms of its resolution dated December 13, 2002, resolving to allot as many as 1,125 number of shares in favour of one shareholder and another like number in favour of another existing shareholders who incidentally happen to be rebel and not to the liking of the other shareholders who have become the company petitioners before the Company Law Board.

33. It does not require a legal expert to recognise that the manner of such allotment is not fair not even uniform. Even the layperson recognises that. But the beauty of law is to convert things to make a common man not to understand and to convert the obvious to be not so, by a complicated legal language.

34. That exactly is what has happened by the innumerable decisions rendered by courts and tribunals at different levels explaining the scope and extent of operation of the provisions of sections 397 and 398 of the Companies Act, what could have been otherwise a clear picture has blurred because of not necessarily uniform way of legal thinking and also because of the problem of finding a solution in different situations and the manifestations of an act of oppression. Human nature is most unpredictable and the ways and means are as innovative under different situations, to achieve what is intended or and are innumerable to human mind and rather unfortunately ill-motivated when it comes to achieving sinister things, achieving selfish things to the detriment of others.

35. The provisions of section 397 of the Companies Act is not in any way helpful to resolve the situation of oppressive conduct, affecting members of a company who complain of suffering and seek relief in terms of petition under section 399 of the Act in view of the conditions mandated for being fulfilled for the Company Law Board to bring about a satisfactory end to the impasse of oppressing act and to terminate the same as indicated in clauses (a) and (b) of sub-section (2) of section 397 while clause (a) envisages one of the two situations namely, affairs of the company being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and the complaint as a later alternative is attracted in the present situation, this coupled with further requirement as contemplated in clause (b) that the situation is such that has to warrant an order to be passed for winding up the affairs of the company but to say order would unfairly prejudice the complainant members and therefore to protect them from passing of winding up order should be avoided and instead the Company Law Board should come up with a solution to bring a satisfactory end to the situation by not only protecting the interest of the complaining members but also removing the oppressive acts and by ensuring that they are not henceforth subjected to further oppressive acts.

36. Human mind being most unpredictable, while no one can guarantee prevention of further oppressive acts, but by learning from the present experience one can devise ways and means to prevent recurrence of such a situation. If this is within the limits of law and within the innovative methods, that can be admitted in terms of the power vested on the Board under section 402 of the Act.

37. Therefore, the touchstone for examining the correctness or otherwise of the impugned order in the present appeals is as to whether the Company Law Board has acted in a manner as to answer these requirements in passing the impugned order. It is in the context of such examination, learned counsel for the appellants as well as the respondents have placed reliance on a good number of authorities referred to and quoted above.

38. This court had an occasion to examine a like company appeal also arising in the background of an order passed by the Company Law Board on a petition under sections 397 and 398 of the Act and in terms of the judgment dated August 12, 2009, rendered in Company Appeal No. 12 of 2005 in the case of Vijayan Rajes v. MSP Plantations P. Ltd., [2009] 151 Comp Cas 413 (Karn). Some of these aspects had been examined by a Division Bench of this court of which one of us was a member and the scope of petition under section 397 to some extent was examined in this appeal.

39. We are of the clear view that to constitute an act of oppression it is not necessary that the act should be an illegal act or an act which is in violation of any statutory provisions. Even an act violating the statutory provisions, itself is an illegal act, which takes care of in terms of other provisions of the Act for correction. But the word “oppression” and the meaning of this in a situation is phenomenon which one has to infer from the facts and circumstances by examining the impact of the act complained of on the complaining members. To some extent it is an abstract concept and also subjective.

40. What act can constitute an act of oppression is dependant on the particular facts and circumstances of each case and that in turn depends, who are all involved in the drama and the background and the circumstances in which such acts are performed and complained of and ultimately depending on what can be the outcome or impact of the same.

41. Bereft of legal considerations, etc., the act of the management in allotting as many as 2,250 shares of the company in favour of two members of the company to the exclusion of all others by itself can constitute an act of oppression and the question will be as to whether this can be said to be otherwise when tested on the touchstone of the statutory provisions of section 397 for grant of relief and in the situations as we have mentioned above in terms of clauses (a) and (b) of sub-section (2) of section 397.

42. In respect of the residuary provisions of section 397 Mr. Chinnappa has pointed out that sub-clause (b) of sub-section (2) of section 397 was in existence even at a time when clause (a) of sub-section (2) of section 397 comprised of the oppressing part on the part of the management or other members of the company and even then it was a requirement on the part of the complaining members complaining oppression to demonstrate that it was inevitably a situation wherein the court finds that it is just and equitable to pass an order to wind up the company and therefore unless a finding that it is a situation wherein it is inevitable to pass an order to wind up operation of the company is recorded and if it is just and equitable ground and in support of the submission, drawn our attention to paragraph 19 of decision in Shanti Prasad Jain v. Kalinga Tubes Ltd. reported in [1965] 35 Comp Cas 351; AIR 1965 SC 1535.

43. Countering the above submission, Mr. Naganand, learned senior counsel has drawn our attention to M.S.D.C Radharamanan v. M. S.D Chandrasekara Raja, [2008] 143 Comp Cas 97; (2008) 6 SCC 750, which makes a reference of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743; (1981) 3 SCC 333 and Shanti Prasad Jain v. Kalinga Tubes Ltd., [1965] 35 Comp Cas 351; AIR 1965 SC 1535 in paragraph 21 to submit that the interpretation to accept that the qualifying part of clause (b) can only be with reference to the former part of clause (a) and not necessarily with reference to later part of oppressing conduct for the reason that when once a case of oppression is made out, that in itself includes a situation of a company to be wound up on just and equitable grounds. This submission commends itself for an acceptance, as the proper understanding of the scope of section 397 of the Companies Act.

44. In the result, Company Appeals Nos. 16 and 18 of 2005 are dismissed. Appeal No. 8 of 2005 is technically speaking allowed only for the following modification of the order of the Company Law Board in so far as it relates to granting relief to the company petitioner and in the following manner.

45. The company is directed to issue six more shares on the same terms as had been issued earlier along with additional 2,250 shares which had been issued in terms of the resolution dated December 13, 2002, so that the total additional shares the company is issuing in favour of its existing shareholders becomes 2,256 and this is to be distributed equally amongst all the then 8 shareholders that is, at 282 shares each and on the same terms. The shareholders who are getting these shares for the first time to pay the amount within four weeks from today by means of a cheque or draft in favour of the company. The company to transfer such additional shares in favour of all members within a further 10 weeks from the date of receipt of the amount by the company.

46. The shareholders who are entitled for the allotment of additional shares as indicated above and who are either no more the shareholders of the company or not inclined to accept the additional allotment can renounce it in favour of any other than the then existing shareholders of their choice and the company to act in terms of such renouncement letter issued by the then existing shareholders in favour of any other than the then existing shareholders of the company. We dispose of the appeal with the earnest hope and expectation that the parties concerned with this arrangement would put an end to their infights, disharmony or even acrimony and start a new cordial relationship with mutual trust and friendship and carry on the company for the mutual benefit.

47. We also place on record our great appreciation for the elaborate and efficient legal assistance received from the Bar particularly from Sri Dhyan Chinnappa and Sri Naganand, learned senior counsel appearing for the parties.