Companies Act, 1956 – Section 87 (2) – 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.
CIVIL APPELLATE JURISDICTION
[RANJAN GOGOI] AND [PRAFULLA C. PANT] JJ.
OCTOBER 07, 2016CIVIL APPEAL NO. 589 OF 2010
Tin Plate Dealers Association Pvt. Ltd. & Ors. …Appellant (s)
Satish Chandra Sanwalka & Ors. …Respondent (s)
CIVIL APPEAL NO.599 OF 2010
J U D G M E N T
RANJAN GOGOI, J.
1. 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.
2. 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 Page 2 2 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”.
3. 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.
4. 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.
5. 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:
(1) restoration of the names of the members of the Sanwalka Group in the register of members of the company;
(2) cancellation of the allotment of bonus shares;
(3) cancellation of the issue and allotment of 25000 partly paid up ordinary equity shares to the Gupta Group;
(4) cancellation of 3065 equity shares to the holders of the 3065 preference shares;
(5) cancellation of the lease agreement in respect of the industrial plot and
(6) 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: