Ketki Research Institute of Medical Sciences Ltd. and Others vs Dr. Ashok P. Arbat

C.L. Pangarkar, J.—Rule. Heard finally with consent of parties.

These two appeals are filed u/s 10F of the Companies Act, 1956 ("the Act") by the original respondents. The parties shall hereinafter be referred to as appellants and respondent.

A few facts may be narrated as follows:

The respondent, Dr. Ashok Arbat, is a promoter and founder director of a company known as Ketki Research Institute of Medical Sciences. Even the appellants were the founders of the said company. The respondent Dr. Ashok Arbat was, until his removal, a managing director-cum-chairman of the board of directors. It appears that the relations between the appellants on one part and respondent, Dr. Ashok Arbat on the other were strained. They were particularly strained because of his strained relations with appellant No. 2 Meena Patil his ex-wife.

The company had obtained a loan from SICOM, a Government of Maharashtra undertaking. The loan amount was more than crores of rupees. The company was unable to repay the loan and there was insistence on the part of the SICOM to liquidate the loan account. The directors were trying to obtain loan from other sources such as United Western Bank, Nagpur Nagarik Sahakari Bank, etc. The SICOM had also offered a one-time-settlement and in pursuance of that these efforts to liquidate the loan were being made. There is, however, a dispute as to who should take the credit of liquidation of loan of SICOM under one-time-settlement scheme. It is apparent that the appellants as well as respondent, Ashok Arbat both want to take credit thereof.

The appellants had moved a resolution to increase the share capital of company so as to raise money for repayment of SICOM loan, since the loan that was offered by Nagpur Nagarik Sahakari Bank was not enough to liquidate the said loan. Accordingly, it is alleged that share capital of the company was increased to 1,00,000 equity shares. Out of these additional shares, it is alleged that appellant Meena Patil illegally got allotted 70,000 shares and further it is alleged that this was done solely with a purpose to gain and retain control over the management of the company.

The respondent, Dr. Ashok Arbat, was removed from the directorship due to his alleged absence in the three consecutive meetings of the company. The respondent, Dr. Ashok Arbat, however, disputes the service of notices on him of all those meetings.

The respondent Dr. Ashok Arbat had, therefore, mainly challenged three decisions of the appellants before the Company Law Board ("CLB"). They are : (i) his removal from the post of CMD, i.e., chairman-cum-man-aging director, (ii) increase in share capital, and (iii) allotment of 70,000 shares in favour of one of the appellants, Dr. Meena Patil. The Company Law Board held in favour of the respondent, Dr. Ashok Arbat and feeling aggrieved by the finding of the Company Law Board the appellants, i.e., the original respondents have preferred appeal No. 13 of 2007. Appeal No. 14 of 2007 is preferred by the same appellants against the order dated August 7, 2007, of the Company Law Board by which it directed the present respondent Ashok Arbat to hold the meeting.

I have heard Shri A. M. Gordey, learned Counsel for the appellants and Shri Sunil Manohar, advocate, for the respondent.

The following questions of law arise:

(1) Whether the impugned order dated March 9, 2007, passed by the Company Law Board in Company Petition No. 106 of 2003 Dr. Ashok P. Arbat v. Ketki Research Institute of Medical Sciences Ltd. [2007] 140 Comp Cas 277 (CLB), is just, proper and sustainable in the eyes of law?

(2) Whether the impugned order dated March 9, 2007, is perverse and based on no evidence?

(3) Whether the delay of nine months caused in delivery of judgment after closing the Company Petition on June 2, 2006, for judgment, would vitiate the judgment on the ground that the delay in delivery of judgment gives rise to unnecessary speculations in the minds of the parties to the case; similarly the appellants may have an apprehension that the arguments raised at the bar have not been reflected or appreciated while dictating the judgment which is apparent in the present matter?

(4) Whether the respondent herein had absented himself from the three consecutive meetings of the board within the meaning of Section 283(1)(g) and that, therefore, there was deemed vacancy of the post of director?

(5) Is the finding of the Company Law Board in that regard perverse?

(6) Was general meeting held on May 4, 2002 ? and if yes, was it lawful?

(7) Was decision to act u/s 81(1)(g) justified and lawful?

(8) Was alleged allotment of 70,000 shares in favour of Meena Patil act of oppression?

(9) Was the Company Law Board justified in passing an order dated August 7, 2007, directing to hold the general meeting?

The first contention that was raised by Shri Gordey was with regard to delay in passing the order after conclusion of the hearing by the Company Law Board. The arguments were concluded on June 2, 2006, and order was delivered on March 9, 2007, i.e., almost after nine months. Shri Gordey submitted that since there was so much of delay, it could be said that there was no proper appreciation of the arguments advanced which has resulted into wrong conclusions and, therefore, the judgment is vitiated. There is no doubt that there is inordinate delay in delivery of the order. Mr. Gordey submitted a decision reported in Kanhaiyalal and Others Vs. Anupkumar and Others, , wherein the Supreme Court has made following observations (page 691):

In the light of what is stated above, in our view, the impugned judgments cannot be sustained. Further, as stated above, the arguments were heard in November 1990 and the High Court pronounced the judgments on May 7, 1993. This court in Bhagwandas Fatechand Daswani and Others Vs. HPA International and Others, dealing with the contention that the long delay in delivery of judgment is sufficient to set aside the judgment under appeal without going into this broad question, set aside the judgment under appeal on the ground of delay in delivery of judgment without expressing any opinion on the merits of the case and remitted the case to the High Court for deciding the appeal afresh on merits. While doing so this court observed, ''However, it is correct to this extent that a long delay in delivery of judgment gives rise to unnecessary speculations in the minds of parties to a case. Moreover, the appellants whose appeals have been dismissed by the High Court may have the apprehension that the arguments raised at the Bar have not been reflected or appreciated while dictating the judgment-nearly after five years.... We, therefore, on this short question, set aside the judgment under appeal''. In this view also the judgments of the High Court under challenge cannot be sustained.

The delay in that case was of three years. In the instant case, the delay is of nine months. Further, I find that the learned member of the Board has exhaustively in fact reproduced the arguments that were made and advanced before it. It may be mentioned that almost 46 pages out of 53 of the judgment are in fact consumed in giving out the facts and the arguments. She has reproduced every argument in the judgment. In the circumstances, it does not appear that she has missed any point.

Mr. Manohar, learned Counsel, has relied on the following decision of the Supreme Court, which has dealt with the subject very elaborately and has suggested certain guidelines to avoid such instances. In Anil Rai v. State of Bihar , the Supreme Court has once again reiterated the need to deliver the judgment immediately. However, it is clear that the delay in delivery of the judgment does not render the judgment void. In spite of such argument the court has not set aside the judgment on the ground of delay. I would prefer to follow the ratio in Anil Rai v. State of Bihar .

I shall now advert to the challenge to the removal of the respondent Dr. Ashok Arbat from the post of CMD and even director. Action against Dr. Ashok Arbat is said to be taken u/s 283(1)(g) of the Act. Section 283(1)(g) reads, thus:

283.(1) The office of a director shall become vacant if-....

(g) he absents himself from three consecutive meetings of the board of directors, or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board;...

With this, therefore, it is necessary to see if the respondent Dr. Ashok Arbat was absent at the three consecutive meetings and if yes, was he absent in spite of service of notices. It is said that Dr. Ashok Arbat was absent for the meetings dated September 17, 2001, November 9, 2001, December 30, 2001 and January 28, 2002. If it is found that notices were not so served, the absence could not be said to be deliberate or voluntary. To my mind, in fact the respondents could not afford to remain absent deliberately due to the fact that he has very large holdings, i.e., almost 18 per cent, in the company and his financial stakes are large. I find that the theory of deliberate absence has to be negatived on this count alone. What section, therefore, contemplates is that when a director does not attend voluntarily for the three consecutive meetings, he shall be deemed to have automatically vacated the post of director. When a person is, however, prevented from attending the meeting by any order of the court or is detained in the prison and not produced for the meeting, his absence could not be said to be voluntary and such person cannot incur any disqualification. When, however, in spite of notice and there being no impediment in attending the meeting, the director absents, he must incur the disqualification u/s 283(1)(g). The section gives out mode by which the post of director shall fall vacant. One of the modes by which such post shall fall vacant is an action u/s 284. Section 284 speaks of removal of director by passing a resolution. Where a director is sought to be removed, a resolution may be necessary u/s 284 but when a director himself incurs disqualification due to operation of law, a resolution shall not be necessary. By operation of law, such post of director shall be deemed to have fallen vacant as soon as he absents himself on third occasion consecutively. The proposition is made clear by Sub-section (2A) of Section 283. This Sub-section says that the director who absents, and incurs disqualification, should not continue to function as director and if he does so he shall be liable to be prosecuted. Therefore, the director cannot continue to function after three consecutive absences, saying that no formal resolution to remove him is yet passed. This means that he ceases to be the director after his third absence and thereafter cannot at all function as a director.

Section 53 of the Act deals with service of documents and notices on the members of the company. Notice means an intimation or a warning. In the present case, the notice is said to be sent under certificate of posting and by courier. No notice by registered post was admittedly sent. The Company Law Board has, in fact, found that there is no proof of service of notice under certificate of posting. Section 53 envisages that the notice must be sent to members to registered address with the company. Firstly, therefore, it will have to be proved as to what is the registered address of the respondent with the company and that the notice is sent on that address. In the instant case, it is not shown as to what is the registered address of the respondent at all. Shri Gordey, learned Counsel, submitted that there is enough proof that notice was sent by certificate of posting and by courier. He submitted that the production of certificate of posting itself is enough to show that such letter was posted and that in due course of business of the postal department it is so delivered.

Shri Manohar, learned Counsel for the respondent, on the other hand, contended that the Supreme Court has repeatedly held that the certificate of posting is not enough to conclude such service. In State of Maharashtra Vs. Rashid Babubhai Mulani, . The Supreme Court has held as follows (pages 415 and 416):

The entire story of sending a notice dated September 6, 1986, by the accused to the complainant is a clumsy belated attempt to explain away the receipt of the illegal gratification on October 6, 1986. Firstly, the direction dated September 3, 1986, by the tahsildar, as noticed above, was to recover the amount due from Baban and there is no direction to recover the amount from the complainant. The accused could not have, therefore, issued any notice of demand to the complainant. Secondly, the notice of demand on September 6, 1986, was not sent by registered post to the complainant, nor delivered personally against acknowledgment. The High Court appears to have accepted the explanation of the accused (that the payment was towards Government dues) as probable, because it was submitted on behalf of the accused that a notice of demand dated September 6, 1986, was sent to the complainant to the accused by registered post. On a specific query by us with reference to the list of documents dated February 3, 1990, filed by the accused before the special judge, learned Counsel for the respondent conceded that the notice dated September 6, 1986, was not sent by registered post. She submitted that the notice was posted on September 6, 1986, at Pune and a certificate of posting was obtained. It is strange that the notice dated September 6, 1986, if really sent, was not posted at the place where the accused was working, but from Pune which is at a distance of about 40 kms. from his place of work. In the written submissions filed before us on October 3, 2005, the accused has confirmed that the notice was not sent by registered post and has attempted to offer some lame explanation as to why the notice dated September 6, 1986, was posted at Pune. It is clear that no notice dated September 6,1986, was issued to the complainant and the accused has tried to create an explanation by securing a certificate of posting dated September 6, 1986, from Pune after the event.

A certificate of posting obtained by a sender is not comparable to a receipt for sending a communication by registered post. When a letter is sent by registered post, a receipt with serial number is issued and a record is maintained by the post office. But when a mere certificate of posting is sought, no record is maintained by the post office either about the receipt of the letter or the certificate issued. The case with which such certificates can be procured by affixing antedated seal with the connivance of any employee of the post office is a matter of concern. The department of posts may have to evolve some procedure whereby a record in regard to the issuance of certificates is regularly maintained showing a serial number, date, sender''s name and addressee''s name to avoid misuse. In the absence of such a record, a certificate of posting may be of very little assistance, where the despatch of such communications is disputed or denied as in this case. Be that as it may.

In yet another case reported in M.S. Madhusoodhanan and Another Vs. Kerala Kaumudi Pvt. Ltd. and Others, , the Supreme Court has observed as follows (pages 55 and 57):

As far as the certificate of posting is concerned, it is not explained why it does not record the despatch of notices to any other shareholder. When the relationship between the parties was already so embittered, the proof of service of notice by certificate of posting must be viewed with suspicion. Judicial notice has been taken that certificates of posting are notoriously ''easily'' available. What was seen as a possible but rare occurrence in 1981 Mst. L.M.S. Ummu Saleema Vs. Shri B.B. Gujaral and Anr, , is now seen as common. Thus, in Shiv Kumar and Others Vs. State of Haryana and Others, , this court said:

We have not felt safe to decide the controversy at hand on the basis of the certificates produced before us, as it is not difficult to get such postal seals at any point of time.

In the present case, the certificate of posting is suspect. Assuming that such suspicion is unfounded, it does not in any event amount to conclusive proof of service of the notice on Madhusoodhanan or on any of the other addresses mentioned in the certificate as held by the Division Bench. Except for producing the despatch register and the certificate of posting, no one on behalf of the respondents came forward to vouch that they had personally sent the notice through the post to Madhusoodhanan and his group. Madhusoodhanan had written two letters contemporaneously dated August 4, 1986 and August 8, 1986, (exhibit P24 and exhibit P35) to Srinivasan, the general manager of Kerala Kaumudi and to Madhavi complaining that he was not receiving any mail at all. These letters were admittedly received but not replied to by the respondents. It is also apparent from a perusal of those letters that Madhusoodhanan had no knowledge whatsoever of the notice for application for allotment of additional shares. Had there been such notice it is improbable that Madhusoodhanan who was fighting for retaining his control over Kerala Kaumudi, would have risked losing such control by abstaining from applying for the additional shares.

In the present case, the relations between the parties seem to be strained. Paragraph "k" in the appeal memo reads, thus-

4(k). due to torture and character assassination during her working in the company, another director Dr. Meena Patil, who was the wife of the petitioner, sought divorce on the said ground from the petitioner.

In that context, the ratio of the decision in the case of M.S. Madhusoodhanan and Another Vs. Kerala Kaumudi Pvt. Ltd. and Others, squarely applies. Shri Gordey, learned Counsel for the appellants, submitted that besides the certificate of posting, the letter written by respondent himself to the appellants would go to show that the notices were delivered to the respondent. My attention was drawn to letter dated September 18, 2001, (record page No. 297) which reads, thus-

To

The Directors

KRIMS Apollo Hospital

Nagpur

September 18, 2001.

The meeting dated September 3, 2001 and September 17, 2001, are illegal and contrary to law for want of proper and adequate notice and they shall not be binding upon the company, board of directors and shareholders.

Dr. Ashok P. Arbat KRIMS Apollo Hospital Nagpur.

Copy to: Dr. Meena Patil

There is no acknowledgment of notice. What is informed is that the meetings dated September 3, 2001 and September 17, 2001, are illegal for want of proper notices. On the other hand, there is a protest that no proper notice was given and meeting is illegal. In view of this letter, it was absolutely necessary to serve the notices to the respondent, Dr. Ashok Arbat by registered post. The learned member of the Board has rightly refused to rely on the certificate of posting. Learned Counsel sought to rely on courier receipt (at page 295). This is sent from KRIMS Hospital to Dr. Arbat on September 15, 2001. One does not know who has received this for Dr. Arbat. On the same page, there is another receipt of courier service dated October 29, 2001. If the signatures on both receipts are compared, they are totally different. If Dr. Arbat had received both of them, the signatures on both of them would be identical. They are not. It was rightly submitted by Shri Manohar that after the respondent had protested on September 18, 2001, at least the notices of meetings dated November 9, 2001, December 21, 2001 and January 28, 2002, ought to have been sent by registered post. They are not. The conclusion of the Board, therefore, that there was no service of notices has to be upheld. The result is, the absence of the respondent, Dr. Ashok Arbat, in the meeting was not voluntary or deliberate but was due to want of intimation. Such absence cannot fall within the scope of Section 283(1)(g). The result is that the post of director cannot be said to have fallen vacant at all. This finding, therefore, of the Company Law Board also has to be upheld.

Was the share capital increased to facilitate the repayment of loan to SICOM or was it ostensibly increased to gain control over the company? There is no dispute that the company was suffering losses and was unable to repay the loan. This is evident from the letters of SICOM, i.e., August 30, 2000, August 6, 2001 and February 8, 2002. These letters are at pages 236 to 245. They say that SICOM had given several concessions to facilitate the repayment of loan, but still the company did not stick to the assurance given. The last notice says that if loan is not repaid, the property would be auctioned. Both sides made much ado as to whose efforts proved more fruitful for securing the loan from the other sources to enable to repay the loan of SICOM. I do not think this is a controversy in which the court needs to go into. From the last letter of SICOM it can be seen that there was an outstanding loan of Rs. 2,40,79,149. It was, therefore, in any case necessary to liquidate the loan account. From the letter dated December 24, 2002, of Nagpur Nagarik Sahakari Bank (page 327) it is clear that it had sanctioned loan of Rs. 75,00,000. This loan was certainly not enough to repay the entire loan of SICOM. There could be no other source to raise money except by raising share capital. To my mind, no fault could be found in increasing the share capital, since the outstanding loan was very large. Shri Manohar, learned Counsel, has submitted that this share capital was not increased for that purpose is evident from the fact that although share capital was increased and share application money was received, loan was repaid much later on January 13, 2003. The material question is not when the loan was actually repaid, but whether otherwise money was available for repayment or not. No money from any other source was in fact available. Thus, I find that the money could rightly be raised by increasing the share capital.

Next question is how the shares should have been allotted and whether the appellants could allot it to themselves and whether there was lawful allotment. Section 81 of the Act deals with the subject. Section 81 reads, thus:

81(1). Where at any time after the expiry of two years from the formation of a company or at any time after the expiry of one year from the allotment of shares in that company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares, then,-

(a) such further shares shall be offered to the persons who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid-up on those shares at that date;...

(1A) Notwithstanding anything contained in Sub-section (1), the further shares aforesaid may be offered to any persons (whether or not those persons include the persons referred to in Clause (a) of Sub-section (1)) in any manner whatsoever-

(a) if a special resolution to that effect is passed by the company in general meeting, or

(b) where no such special resolution is passed, if the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the proposal contained in the resolution moved in that general meeting (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the proposal by members so entitled and voting and the Central Government is satisfied, on an application made by the board of directors in this behalf, that the proposal is most beneficial to the company.

It is, thus, clear that the normal rule of allotment is to be found in Sub-section (1) while an exception is to be found in Sub-section (1A). It is only if the company decides to deviate from normal rule that the action under Sub-section (1A) can be taken. Sub-section (1) is enacted with a view that the existing shareholders should be first benefited and they should be given preferential right to have them. This is also with a view that the pattern of holding should not at all change lest that may be used ostensibly to gain control over the company. Therefore, the additional shares have to be allotted in proportion to the existing holding of the shareholders. If these existing shareholders decide to renounce the rights shares, the company may deal with them u/s 81(1)(d). The submission of Shri Manohar, learned Counsel, that Sub-section (1A) is an exception, therefore, appears to me to be correct. Before, however, the company decides to act under subsection (1A) it has to either pass a special resolution or where no such special resolution is passed, a voting is held in meeting where simple majority of the voters cast votes in favour of the proposal. Furthermore, Sub-section (1A)(b) contemplates of the application by the Board of directors to the Central Government and the Central Government should be satisfied that such allotment is beneficial to the company. After Clause (a) to Sub-section (1A) word "or" is used, therefore, the company can certainly resort to either of the clauses.

In the present case, the appellants claim to have passed special resolution in a meeting said to be held on May 4, 2002. Shri Manohar, learned Counsel, submitted that a special resolution is to be passed as per the provisions of Section 189 of the Act. This section reads, thus-

Ordinary and special resolution.- (1) A resolution shall be an ordinary resolution when at a general meeting of which the notice required under this Act has been duly given, the votes cast (whether on a show of hands, or on a poll, as the case may be) in favour of the resolution (including the casting vote, if any, of the chairman) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, exceed the votes, if any, cast against the resolution by members so entitled and voting.

(2) A resolution shall be a special resolution when-

(a) the intention to propose the resolution as a special resolution has been duly specified in the notice calling the general meeting or other intimation given to the members of the resolution ;

(b) the notice required under this Act has been duly given of the general meeting; and

(c) the votes cast in favour of the resolution (whether on a show of hands, or on a poll, as the case may be,) by members who, being entitled so to do, vote in person, or where proxies are allowed, by proxy, are not less than three times the number of the votes, if any, cast against the resolution by members so entitled and voting.

It is, thus, clear that the intention to propose the resolution as special resolution has to be duly notified in the notice calling general meeting and again a notice is to be given of general meeting also. Learned Counsel submitted that the notice of this special resolution or the meeting was not given to the shareholders or respondent, Dr. Ashok Arbat. We have already seen how notice is to be sent and when a notice can be said to have been actually given. My attention was invited to pages 35 to 55 which are certificates of posting. The law with regard to that is already discussed and it is found that a notice by a certificate of posting is never treated as a due notice to other party. In the present case, we have seen that respondent Dr. Ashok Arbat had already protested that he has not been receiving the notices. In spite of such protest and particularly when the relations are extremely strained, a proper notice by registered post or by other reliable means was necessary. Here, the notice having not been sent by any other mode, it has to be said that there was no notice to either respondent or the shareholders. The minutes of the meeting, copy of which is filed at page 5 of the affidavit of Dr. Rathi, clearly go to show that only seven persons were present in the meeting including the directors, 22 were proxies. It is a matter of common knowledge that the proxies can be collected easily. Had really the notices been sent, a large number of shareholders would certainly have attended the meeting since one of the subjects was offer of additional shares, and many shareholders and other persons had sent the share allotment applications along with share money. The fact that only seven out of 368 shareholders attended the alleged meeting leads one to draw an inference that in fact no notice was sent and no meeting was also held.

This takes me to consider if the alleged resolution is passed as mandated by Sub-section (2)(c) of Section 189. It says that the number of votes cast in favour of resolution should be at least three times more than the votes which are cast against. The resolution at page No. 5 of the affidavit of Dr. Rathi does not make it clear if the resolution was unanimous or if there was any opposition and if there was any opposition, how many were opposing it. The fact that there is no reference to this aspect suggests that no such meeting was at all held. In the circumstances, it cannot be said that any special resolution u/s 81(1A) was passed.

It can be demonstrated that the resolution No. 3 passed in meeting dated May 4, 2002, is not a resolution which could be passed u/s 81(1A) though it is so styled. I reproduce here the said resolution.

Item No. 1.- To approve the appointment of Dr. Meena Patil (Arbat) as managing director.

It is resolved that consent of the company be and is hereby accorded u/s 269(2) read with Schedule XIII of the Act to the appointment of Dr. Meena Patil as managing director of the company for a period of two years with effect from September 17, 2001, without any remuneration.

Item No. 2.- To increase the authorised share capital.

It is resolved that authorised share capital of the company be increased from Rs. 100 lakhs divided into 10 lakhs equity shares of Rs. 10 each to Rs. 125 lakhs divided into 12.5 lakhs equity shares of Rs. 10 each ranking pari passu with the existing share capital of the company and according to Clause V of the memorandum of association of the company be altered accordingly.

Item No. 3.- To issue the unissued capital of the company.

It is resolved that in accordance with the provisions of Section 81(1A) of the Act, the board of directors of the company be and is hereby authorised to issue 3.03 lakhs equity shares of Rs. 10 each and part out of the unissued share capital of the company and such shares shall be offered, issued and allotted on such terms and conditions and to such persons as the board deem/think fit and proper and shall rank pari passu with the existing equity share of the company.

To my mind, this is merely a resolution proposing to increase the share capital u/s 81(1). What Sub-section (1A) contemplates is offering of shares to any persons whether or not they are existing shareholders. All the same, section speaks of allotment or offer to persons. This section specifically makes use of the word "persons". The resolution, therefore, must show the name of the persons or class of persons or class of shareholders to whom they are so offered. If the names or class is not disclosed, to my mind, it would be a redundant resolution altogether and not one under Sub-section (1A). In the instant case, no such persons are named and there is no actual allotment or offer to any person whatsoever. If the resolution is read, it means to say that in future the board of directors may allot the shares to such persons as deemed fit. Virtually, therefore, there is no offer under this resolution to any persons or class of persons or shareholders all.

The special resolution to that effect has to be completely passed by the general meeting and the task cannot be left to the board of directors. This is contemplated by Section 81(1A) at all. This resolution for this reason, to my mind, therefore, is absolutely illegal and not according to Section 81(1A). Shri Manohar, learned Counsel, had placed reliance on the decision of the Calcutta High Court reported in Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. [1984] 55 Comp Cas 160 :[1983] T LR 2479. The court observed as follows:

Whether a particular resolution or notice should be specific as to the manner and to the persons to whom the shares would be offered, or as to whether the entire share value should be paid at a time or whether the persons should be indicated belonging to a particular group or not must, in certain cases, be a mixed question of law and fact. Though it is quite true that on the construction of the section it was not obligatory that a special resolution to that effect must always mean that the persons or the allottees'' names should specifically be made or the manner of their allotment should also be specifically indicated but in an appropriate case, that is to say, where the allotment of shares might tilt the balance of the shareholdings and might transform the major bulk of the shareholders, as in the instant case, the particulars of the allottees or the manner of their allotment should also be indicated. This is necessary because in the existing climate of erosion of the intrinsic sense of fairness it is necessary in some cases to insist on certain procedural safeguards to ensure fair play in action in corporate management Shanti Prasad Jain Vs. Kalinga Tubes Ltd., and Kalinga Tubes Ltd. and Others Vs. Shanti Prasad Jain and Others, discing.

With respect, I beg to differ though not fully. Section 81(1A) is an exception, i.e., it permits deviation from normal rule. Where the company wants to deviate from the normal rule, it must make aware the persons who are supposed to vote, as to who would be the persons who would get the shares and who would be benefited. It is only then that the arbitrariness in the action could be avoided. In the case at hand, one of the directors had got allotted to herself 70,000 shares and has not cared for the allotment of other shares. Now, had this subject come before the general meeting, there could have been an opposition or there could have been a proper allotment of the shares and there would not have been an arbitrariness in allotment of 70,000 shares to a single person. The only intention of appellants was to convert Dr. Meena Patil into a majority shareholder and to gain control over the company. In that context, the ratio of the above ruling can be squarely applied.

The form of return of allotment filed at page 12 with the affidavit of Dr. Rathi shows that 70,000 shares are allotted to Dr. Meena Patil, one of the appellants. In fact resolution dated May 4, 2002, does not show that 70,000 shares should be allotted to her. In the absence of such specific resolution by the extraordinary general meeting, the allotment itself is completely vitiated.

Shri Gordey, learned Counsel for the appellants, contended that once a resolution is passed that the share shall be allotted by the board of directors to persons deemed fit that is enough. I do not find any force in the argument. I have already observed that the offer of shares to any persons or class of persons must be by the shareholders in general meeting and by a special resolution. A special resolution cannot be passed by the board of directors and it has to be necessarily passed by the general meeting u/s 189. If there is anything in the articles of association, which is repugnant to the provisions of Sections 81(1A) and 189, the Sections would prevail and not the articles of association. Even otherwise, it may be pointed out that there is no resolution even of the board of directors to allot shares to Dr. Meena Patil or to any other shareholders. The Supreme Court in Dale and Carrington Invt. (P) Ltd. and Another Vs. P.K. Prathapan and Others, has held that Section 81 of the Act does not apply to a private limited company. The present company is a public limited company and, therefore, Section 81 has an application.

I have already discussed the difference between Section 81(1) and 81(1A). I have also observed that the board of directors have to play no role in allotment of shares when action is sought to be taken under Sub-section (1A), i.e., passing of a special resolution which can be passed in a general meeting only. For this reason, it must be concluded that the job of actual allotment of shares, proportion, etc., cannot be left to the board of directors.

The Supreme Court in Dale and Carrington Invt. (P) Ltd. and Another Vs. P.K. Prathapan and Others, has observed as follows (headnote of Dale and Carrington Invt. (P) Ltd. and Another Vs. P.K. Prathapan and Others, ):

The contention of the appellant that since the articles of association of the company give absolute power to the board of directors regarding issue of further share capital, therefore, the board of directors exercised the power while issuing further shares in favour of R and the same cannot be challenged has no merit because the facts of the case do not support the argument. Firstly, the articles of association require such decisions regarding issue of further share capital to be taken in a meeting of the board of directors. Neither a copy of a notice convening the board meeting in which the additional shares are purported to have been issued to R nor the logbook meant to record signatures of directors attending the meeting of the board of directors was produced. The photocopy of the minutes of the alleged meeting dated October 24, 1994, produced by the appellants, is a sham and is fabricated. In the absence of these documents and any other proof to show that a meeting was held as alleged, it cannot be accepted that a meeting of the board of directors was held on October 24, 1994. Secondly, assuming for the sake of argument that meetings of the board of directors did take place, the manner in which the shares were issued in favour of R without informing other shareholders about it and without offering them to any other shareholder, the action was totally mala fide and the sole object of R in this was to gain control of the company by becoming a majority shareholder. This was clearly an act of oppression on the part of R towards the other shareholder who has been reduced to a majority shareholder as a result of this act. Such allotments of shares have to be set aside.

The facts of the instant case are almost identical. In the instant case, further it is doubtful if any meeting at all was held and 70,000 shares were allotted without concurrence of the general meeting and that too to one of the appellants. In the circumstances, it must be concluded that it was an act of oppression.

Learned member of the Company Law Board has held that such allotment of 70,000 shares is an act of oppression and I find substance in what is observed. Learned Counsel for the appellants as well as respondent have put reliance on decision in Needle Industries (India) Ltd. and Others Vs. Needle Industries Newey (India) Holding Ltd. and Others, . The ratio for the purpose of this appeal is laid down in paragraph 106 which I quote (page 809):

Peterson,J applied the principle enunciated in Fraser [1864] 71 ER 36 and in Punt [1903] 2 Ch. D 506 in the case of Piercy v. S. Mills and Co. Ltd. [1920] 1 Ch. D 77. The learned judge observed at page 84:

The basis of both cases is, as I understand, that directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders.

The fact that by the issue of shares the directors succeed, also or incidentally, in maintaining their control over the company or in newly acquiring it, does not amount to an abuse of their fiduciary power. What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company.

I have found that there was need to increase the share capital to raise money for repayment of loan, the purpose for which such exercise was undertaken by the appellants appears to be oblique. There are two reasons why such a conclusion can be drawn. Firstly, it is clear that as per normal rule, the shares are not offered as rights shares to the existing shareholders. No reasons are given why necessity to deviate from Sub-rule (1) was felt. It is not that there was no response from public to subscription. All shares seem to have been subscribed. It is also not disputed that though applications with share money were received, the shares are not allotted and the money is lying idle. Had, therefore, the objective of the appellants been only to raise the money to repay the loan, the allotment of shares would have been done immediately and they would not have allowed the money to remain idle. Same can be said about allotment of 70,000 shares to appellant Dr. Meena Patil. If all other shareholders and general public had applied and there was good response, there was no need to allot to Dr. Meena Patil the 70,000 shares. For this reason also, it can be said that main objective was to raise one''s own holding only. There is no explanation from the appellants as to what was the impediment in allotting the shares (rights) to other shareholders. Again at the cost of repetition, it could be said that without there being a resolution in general meeting 70,000 shares seem to be simply appropriated by Dr. Meena Patil to gain and retain control over the company. The ratio in Needle Industries (India) Ltd. and Others Vs. Needle Industries Newey (India) Holding Ltd. and Others, as quoted above can squarely be applied due to above reasons to the case at hand.

The appellants also challenge the order of the Company Law Board passed on August 7, 2007. This order was passed since there was no compliance of order dated March 9, 2007. The operative part of the order dated March 9, 2007, reads, thus

(a) Since I held that the contention of the respondent-company that the petitioner has vacated office of director u/s 283(1)(g) of the Act cannot be sustained for the reasons given above, I declare that the petitioner shall continue as a director of the company.

(b) The issue and allotment of 70,000 equity shares to respondent Nos. 2, 3 and 4 on August 10, 2002, is hereby declared null and void. The issue and allotment is cancelled and status quo ante as on August 9, 2002, is hereby restored. The register of members be rectified accordingly forthwith.

(c) To safeguard the interest of the respondent-company, I hereby direct the Registrar of Companies, Mumbai, Maharashtra to oversee the respondent-company''s next AGM/EGM to be held by the respondent-company within six weeks of the receipt of this order by the respondent-company.

With the above directions, I dispose of this petition and all company applications made in this petition. All interim orders made are hereby vacated. No order as to cost.

Thus, there is a direction to the respondent to hold a meeting within six weeks under the supervision of Registrar of Companies. Since the meeting was not held and respondent was prevented from entering premises of company, he moved an application purporting to be an application under 634A of the Act for giving further directions to implement the order. It is on this application that the Company Law Board passed the second order dated August 7, 2007. It is to the following effect:

The respondents are hereby again directed to comply with the Company Law Board''s order dated March 9, 2002. The petitioner''s counsel states that the petitioner is not permitted to enter the premises, guards physically prevent him as per the orders of the CMD, namely, Mrs. Meena Patil. The petitioner is allowed to enter the premises in compliance with the Company Law Board''s order referred to above. It is not understood as to why the EGM as directed has not been called for so far. The petitioner is allowed to take steps to hold the EGM forthwith. The Registrar of Companies, Mumbai to look into the matter is directed earlier. Despite four weeks time given to the respondents to file reply to CA No. 184/07, no reply has been filed as yet. Adjourned to September 12, 2002, at 2.30 p.m.

From the first order itself, it is clear that the status of the respondent herein as a director was restored and he continued to be one of the directors. Application shows that respondent, Dr. Ashok Arbat had issued a letter dated March 21, 2007, to the appellants herein to convene a meeting as directed by the Company Law Board. Since no meeting was held, he moved the Registrar that no meeting is being convened. The respondent Dr. Ashok Arbat once again issued a notice on April 7, 2007, that meeting shall be held on April 10, 2007, on which the appellants informed that they intend to prefer appeal and, hence, it would not be proper to hold meeting. Hence, respondent, Dr. Ashok Arbat filed an application u/s 634A.

One cannot lose sight of the fact that the respondent''s status as director was restored. He was, therefore, himself bound by the direction of the Company Law Board to hold a meeting. Obviously, from the above facts the appellants did not want to obey the order of the Company Law Board. The respondent, Dr. Ashok Arbat was, therefore, justified in moving the Company Law Board to see that the order is enforced. Shri Gordey submitted that any order that is passed by the Company Law Board can be executed as if it is a decree and as such no such further directions could be given. Firstly, as stated, the removal of the respondent from the board was held to be bad and his status as a director was held to be restored as a necessary corollary. When he was reinstated as director, he Lad every authority to act as such and enter the premises of the company. As such if the Company Law Board further gave direction to allow respondent, Dr. Ashok Arbat to enter premises, there was nothing wrong. Ultimately, it is the duty of every court to see that the order passed by it is implemented. In fact, if the second order allowing him to enter the premises would not have been passed, the first order restoring his status as director would be meaningless. I see no illegality in giving such order to enforce the first order.

Coming to the next part of the order, i.e., the direction to the company to hold meeting and since that was not obeyed, the direction to respondent, Dr. Ashok Arbat, to take steps to hold meeting under the guidance of Registrar of Companies, it was contended that such a direction is altogether illegal. Shri Gordey submitted that the meeting can be convened by the shareholders upon a requisition only and the Company Law Board cannot enter into that arena. It must be borne in mind that the respondent had sent a requisition to the company twice to hold the meeting but it was not heeded. The respondent was illegally removed from the directorship. His status was restored and yet he was being kept out of the management of the company. There was also illegal allotment of 70,000 shares by the appellants. A decision with regard to other shareholders and share money of other persons lying with the company was necessary to be taken. All these things could be done in the general meeting and they could be set right in a general meeting. It was, therefore, necessary to hold such a meeting. I do not think that the Company Law Board has no legal right to give such a direction. Section 634A is not the only section in the Act, which can be resorted to. We have to refer to Section 10E under which the Board is constituted. I reproduce here Sub-section (5) of Section 10E of the Companies Act.

10E.(5) Without prejudice to the provisions of Sub-sections (4C) and (4D), the Company Law Board shall in the exercise of its powers and the discharge of its functions under this Act or any other law be guided by the principles of natural justice and shall act in its direction.

The Board is, therefore, guided by the principles of natural justice and can act in its discretion to exercise the powers under the Act. Section 186 of the Act confers a power on the Company Law Board to order to convene a meeting. Therefore, if Section 10E and Section 186 are read together, the order as passed by the Company Law Board directing holding of such meeting cannot be said to be illegal. It was contended that the direction could not have been given to Dr. Ashok Arbat but could have been given to company. Initially, such order was given to the company but the management of the company did not feel it necessary to obey the order. Therefore, a direction to respondent, Dr. Ashok Arbat, who was one of the directors to hold the meeting was quite justified. I, therefore, see no substance in any of the appeals preferred by the appellants. They are dismissed with costs.