Rajendrakumar Tekriwal vs Unique Construction Pvt. Ltd. and Others

R.M. Doshit, J.—These two Appeals preferred u/s 10F of the Companies Act, 1956 (hereinafter referred to as ''the Act'') arise from the

judgment and order dated 8th October, 2007 passed by the Company Law Board, Principal Bench, New Delhi (hereinafter referred to as ''the

Board'') in Company Petition No. 111/2007.

The appellant in O.J. Appeal No. 245/2007 is one Rajendrakumar Tekriwal, Chairman and Joint Managing Director in the respondent No. 1

M/s. Unique Construction Private Limited (hereinafter referred to as ''the Company''). The respondent No. 2 Shri Rajeshkumar Jain is the

Managing Director in the said M/s. Unique Construction Private Limited. The respondent No. 3 is one Anandrao Gaekwad.

The aforesaid Shri Gaekwad holds a perpetual leasehold right over the land bearing Municipal No. 79 admeasuring 77708 sq.feet situated at

Indore. On 14th June 1950, the said land was leased to the father of the respondent No. 3, Shree Khanderao Shivajirao Gaekwad by the then

Government of Madhya Bharat. A cinema in the name of Yashvant Talkies had been constructed over the said land.

The Company was incorporated on 6th October 1989 with the authorised share capital of Rs. 5 lakhs divided into 5000 shares of Rs. 100=00

each. In the year 1994 the respondent No. 3 Anandrao Gaekwad entered into an agreement and a memorandum of understanding (MOU) with

the Company and the respondent No. 2, its Managing Director, in respect of the development of a commercial complex on the aforesaid land

bearing Municipal No. 79. Under the said agreement and the MOU, the Company agreed to develop a commercial building ''Yashvant Plaza'' on

the said land and to share the sale proceeds with the respondent No. 3 in the ratio of 45% and 55%. Since the said agreement, on 29th April 1997

the Company entered into an MOU with the appellant for sharing the development right of the said land in the ratio of 10:90. The said ratio was

revised to 50:50 by later MOU dated 4th July 1998. On 18th June 1998 a tripartite agreement for development of the said land was entered into

between the Company, the respondent No. 3 and one Yashvant Entertainment and Investment Private Limited. On 29th June 1998, the authorised

share capital of the Company of Rs. 5 lakhs was increased to Rs. 6,15,000=00 divided into 6150 shares of Rs. 100=00 each. Pursuant to the

MOU dated 4th July 1998, the appellant was allotted 3062 shares of Rs. 100=00 each. 61 shares were allotted to one Vishnuprasad Shukla of

Indore. Pursuant to the said understanding, the appellant was appointed as Chairman and Joint Managing Director. The members of his family

were appointed as the Directors in the Company.

In the year 2002, the appellant transferred 50% of his stock i.e. 1531 shares in the Company to the group of the abovenamed Vishnuprasad

Shukla. Since the said transfer; on 19th November 2003 the authorised share capital of the Company of Rs. 6,15,000=00 was increased to Rs. 9

lakhs. That was further increased to Rs. 25 lakhs on 11th July 2005. At first, 2876 shares were allotted to the respondent No. 2 and a further

14000 shares were allotted by the Company to the HUF of the respondent No. 2 and the son of the respondent No. 2. A further allotment of

2000 shares was made by the Company to the HUF of the respondent No. 2. None of the aforesaid allotments was registered with the Registrar

of Companies until the year 2005.

Feeling aggrieved, the appellant instituted a civil suit in the Civil Court at Indore, which came to be referred to the Arbitrator.

The appellant then approached the Board under Sections 397 to 401 of the Act in above referred Company Petition No. 111/2007. The

appellant complained of the oppression. According to the appellant, the Company and the respondent No. 2 had surreptitiously removed the

appellant and his family members from the directorship of the Company; had connived to reduce the holding of the appellant in the Company from

50% to a flimsy 6.15%. The Company and the respondent No. 2 have, by not transferring legal and valid rights to the purchasers of the shops and

offices in the commercial complex, defrauded the public at large. The appellant complained that the affairs of the Company were conducted in a

manner prejudicial to the public interest and oppressive to the appellant. The appellant prayed that:

The Board resolution dated 27th December, 2004 and Form No. 32 Dt.27th December, 2004 removing the petitioner and his wife Smt. Meera

Tekriwal and son Shri Gaurav Tekriwal from the directorship of the Company be declared null and void;

The Board resolution dated 24.11.2003 allotting 2876 (Two thousand eight hundred seventy six) equity shares of the Respondent No. 1 Company

to the Respondent No. 2 and Form No. 2 dated 27.11.2003 be declared null and void;

The Board resolution dated 14.07.2005 allotting 14000 (Fourteen thousand) equity shares of the Respondent No. 1 Company to the Respondent

No. 2 and Form No. 2 dated 14.07.2005 be declared null and void;

The Board resolution dated 27.07.2005 allotting 2000 (Two thousand) equity shares of the Respondent No. 1 Company to the Respondent No. 2

and the Form No. 2 dated 27.07.2005 be declared null and void;

The Respondents be directed to submit an audited statement of Account of the Respondent No. 1 Company showing therein the present state of

affairs including income showing cash component on sale and expenditure of the Indore based Yashvant Talkies Project;

Sale Transactions for 50% of the project property at Indore based project at the Yashvant Talkies Indore be declared null and void;

Declare that transfer of 1531 shares by petitioners to Mr. V. Shukla, under misrepresentation and fraud and the purchase of the said shares by the

respondent No. 2 from Mr. V. Shukla, be declared as null and void and shares be restored to the petitioners.

The petition was contested by the Company and the respondent No. 2. According to the said respondents, the petition under Sections 397 and

398 of the Act was not maintainable; the appellant and his representatives had ceased to be Directors of the Company by force of law and not by

a covert action of the Company or its Board of Directors. The appellant did not hold the required 10% of the shares.

The respondent No. 3 : Anandrao Gaekwad appeared before the Board. He filed Civil Application No. 396/2007 seeking deletion from the

array of the parties. According to the respondent No. 3, he had entered into an agreement with the Company. In the agreement between the

Company and the appellant, the respondent No. 3 was not a party; that he was not connected with any dispute between the appellant and the

Company or the respondent No. 2. The appellant had no cause of action against the respondent No. 3. He was not a necessary or a proper party.

His name, therefore, should be deleted from the proceedings.

The Board, by its judgment and order dated 9th October 2007, allowed the petition partially. The Board recorded that the appellant had

transferred 1531 shares (50% of his holding) to the group of Vishnuprasad Shukla of his own volition. The Board recorded that ''the petitioner has

withdrawn the prayer at para 8.7 pertaining to the alleged transfer of 1531 shares by the petitioners to one Mr. V. Shukla.'' The Board did accept

that the action of the Company in increasing its share capital from Rs. 6,15,000=00 to Rs. 9,00,000=00 and later to Rs. 25,00,000=00 and the

allotment of shares to the respondent No. 2 and his nominees, was illegal and oppressive to the appellant. The Board, therefore, was pleased ''to

set-aside allotment of shares made on 24.11.2003, 14.7.2005 and 27.7.2005 totalling to 18876 (2876, 14000 and 2000), the allotment is

declared null and void and status quo ante is restored''.

As to the removal of the appellant and his family members from the directorship of the Company, the Board was pleased to hold, ''...I find that

this company not being in the nature of quasi-partnership, (though there are agreements and MOU which partakes the form of Partnership

Agreement, the partnership referred to being unregistered, the agreements/MOUs are claimed to be unenforceable), as a principle, directorial

complaints cannot be a ground in a petition under Sections 397/398 as the complaints in such a petition should be relating to the rights qua a

member. It is only in case of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints

have been adjudicated by this Board in Sections 397/398 proceedings.'' In view of the aforesaid finding, the Board refused to grant directorial

reliefs. The Board also refused to grant relief in respect of sale transaction of 50% of the project property and the audited statement of accounts of

the project property.

The plea of the respondent No. 3 did not appeal to the Board. The Board was pleased to hold, ''...Merely because the applicant did not sign

as a party in the agreement dated 4.7.1998, the applicant cannot seek discharge from the present proceedings. The petition against the applicant is

correct in view of his involvement in various agreements and as owner of the land in respect of which the development agreement and MOU dated

4.7.1998 were signed.''

Feeling aggrieved to the extent the appellant has not been granted relief in respect of removal as Director and the other reliefs, the appellant has

preferred the above O.J. Appeal No. 245/2007 u/s 10F of the Act.

Feeling aggrieved to the extent the allotment of 18876 shares made on 24th November 2003, 14th July 2005 and 27th July 2005 is set-aside,

the Company and the respondent No. 2 have preferred the above O.J. Appeal No. 254/2007 u/s 10F of the Act. The Company and the

respondent No. 2 have filed Civil Application No. 404/2009 to bring on record the developments that have taken place pending these Appeals. It

is contended that since the hearing of these Appeals, the appellant Rajendrakumar Tekriwal has approached the District Court at Indore for

appointment of Receiver for preservation and safe custody of the property ''Yashvant Plaza''.

Learned advocate Mr. Vakharia has appeared for the appellant in O.J. Appeal No. 245/2007 ''Rajendrakumar Tekriwal. Mr. Vakharia has

taken us through the pleadings, the Memorandum and Articles of Association of the Company, the above referred Memoranda of Understanding

and the agreements. He has particularly relied upon Articles 9 to 14 of the Articles of Association pertaining transfer of shares. He has submitted

that under the Articles of Association any member of the Company who desires to sell his shares is required to make offer to any other member

who may be willing to buy the shares at the fair value determined by the auditors. He has submitted that the transfer of the shares of the

abovereferred Vishnuprasad Shukla to his sons Durgesh Shukla and Sanjay Shukla is illegal. The said shares ought to have been first offered to the

appellant. Thus, in the matter of transfer of shares, the appellant''s right to preemption conferred by the Articles of Association has been abrogated.

This conduct of the Company and the respondent No. 2 alone is sufficient to establish oppression against the said respondents. He has also

submitted that neither the appellant nor his family members who were directors in the Company was given intimation of the meeting of the Board of

Directors held on 19th November 2003, 11th July 2005 or any other meeting held since the year 2003. Thus, the appellant was surreptitiously

kept out of the management of the Company. He has submitted that by the aforesaid clandestine increase in the authorised share capital of the

Company, not only the respondent No. 2 and his family members received 18876 additional shares in the Company but they have also earned

hefty amount of dividend on the aforesaid 18876 shares of the Company. He has submitted that the appellant and his family members were

surreptitiously removed from the directorship of the Company. The said action having been found to be bad and illegal, the Board ought to have

interfered in the matter and have restored the appellant and his family members on the Board of Directors of the Company.

Learned advocate Mr. Rakesh Gupta has appeared for the respondent No. 3 Anandrao Gaekwad. He has reiterated the plea raised before

before the Board. He has submitted that the respondent No. 3 has no connection whatever in respect of the dispute between the appellant and the

Company and the respondent No. 2. The respondent No. 3, therefore, be discharged from the present proceedings.

Mr. Vakharia has also relied upon the pleadings in Civil Application No. 411/2007 and the reply affidavit filed before the Court at Indore in

Civil Suit No. 89A/2006 to complain that since the year 2002, in contravention of the aforesaid agreements and the memoranda of understanding,

several shops and offices in the aforesaid ''Yashvant Plaza'' have been sold away by the Company and the respondent No. 2 to the detriment of

the interest of the appellant.

Mr. Vakharia has submitted that the oppression and mismanagement of the Company are apparent and need not be proved. Inspite of its

finding against the Company and the respondent No. 2, the Board has erred in not granting complete relief to the appellant. In support of his

submissions, Mr. Vakharia has relied upon the judgments of the Hon''ble Supreme Court in the matters of M.S. Madhusoodhanan and Another

Vs. Kerala Kaumudi Pvt. Ltd. and Others, of Dale and Carrington Invt. (P) Ltd. and Another Vs. P.K. Prathapan and Others, of Sangramsinh P.

Gaekwad and Others Vs. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Others, of Kamal Kumar Dutta and Anr. v. Ruby General Hospital Ltd.

and Ors. (2006) 7 SCC 613 ; of Shri V.S. Krishnan and Others Vs. Westfort Hi-tech Hospital Ltd. and Others, and of Needle Industries (India)

Ltd. and Others Vs. Needle Industries Newey (India) Holding Ltd. and Others,

Learned advocate Mr. Navin Pahwa has appeared for the Company. At the outset, he has submitted that the present Appeal u/s 10F of the

Act is not maintainable. In the submission of Mr. Pahwa, the Appeal does not involve a question of law. He has submitted that the appellant

disposed of 50% of his holding of his own volition. The said act cannot be termed as an oppression. The appellant, therefore, cannot claim right of

preemption. He has further submitted that a single act of oppression would not be sufficient to maintain a petition under Sections 397/398 of the

Act. Oppression, if any, must be established to be continuous. He has submitted that the appellant and his family members were not removed from

the Board of Directors by the Company. He has submitted that the appellant and his family members ceased to be the Directors of the Company

as they failed to attend the meetings of the Board of Directors for three times in a row. He has submitted that the appellant has failed to make out a

case of oppression. The petition under Sections 397 and 398 of the Act was misconceived. In support of his submission, he has relied upon the

accounts and the pleadings submitted before the Board. He has relied upon the judgment in the matter of Sangramsinh P. Gaekwad and Others

Vs. Shantadevi P. Gaekwad (Dead) thr. Lrs. and Others, particularly paragraph 177 thereof].

Learned advocate Mr. N.D. Nanavati has appeared for the respondent No. 2. Mr. Nanavati has also questioned the maintainability of the

present Appeal u/s 10F of the Act. He has relied upon Section 283(1)(g) of the Act to buttress the submission that the appellant and his family

members had ceased to be the Directors of the Company by force of law. He has further submitted that the oppression requires to be specifically

pleaded and proved. In absence of specific allegation of oppression, the petition u/s 397 of the Act before the Board was not maintainable. Mr.

Nanavati has also relied upon the judgment in the matter of Sangramsinh P. Gaekwad and Ors. (supra).

In the matter of M.S. Madhusoodhanan and Anr. (supra), the Hon''ble Supreme Court has discussed the manner and method of proper

service of a notice.

In the above referred judgment of Kamal Kumar Dutta and another, the Hon''ble Court observed that, ''...the Board meetings of the

respondent Hospital were convened without proper service of notice on appellant Director.'' In view of the said finding, the Hon''ble Court was

pleased to hold, ''...However we have examined the matter in detail and we are satisfied that there is full proof case of oppression.'' In view of the

said finding, the Hon''ble Court proceeded to set-aside the resolutions passed at the concerned Board meetings.

In the matter of Dale & Carrington Invt. (P) Ltd.(supra), the Hon''ble Supreme Court considered the action of the appellant-company in

increasing the share capital to reduce the majority shareholder to minority shareholder by malafide act of the company or its Board of Directors to

be a case of oppression.

In the matter of V.S. Krishnan and Ors. (supra) in paragraph 14 of the judgment, the Hon''ble Court has summarised the incidences which

would make out a case of oppression as under:

From the above decisions, it is clear that oppression would be made out:

(a) Where the conduct is harsh, burdensome and wrong,

(b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the

immediate purpose would result in an advantage for some shareholders vis-a-vis the others.

(c) The action is against probity and good conduct.

(d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action

is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity,

good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and

398.

(e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the Company Law Board u/s 402 to

set right, remedy or put an end to such oppression is very wide.

(f) As to what are facts which would give rise to or constitute oppression is basically a question of fact and, therefore, whether an act is oppressive

or not is fundamentally/basically a question of fact.

In the matter of Needle Industries (India) Ltd. and Ors. (supra), the Hon''ble Supreme Court has issued summary of its judgment for guidance.

While considering what constitutes an act of oppression in extenso, the Hon''ble Court held, ''...The true position is that an isolated act, which is

contrary to law, may not necessarily and by itself support the inference that the law was violated with a mala fide intention or that such violation

was burdensome, harsh and wrongful. But a series of illegal acts following upon one another can, in the context, lead justifiably to the conclusion

that they are a part of the same transaction, of which the object is to cause or commit the oppression of persons against whom those acts are

directed.'' The Court further held, ''...It is clear from these various decisions that on a true construction of Section 397, an unwise, inefficient or

careless conduct of a Director in the performance of his duties cannot give rise to a claim for relief under that section. The person complaining of

oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes

prejudice to him in the exercise of his legal and proprietary rights as shareholder.''

In the matter of Sangramsinh P. Gaekwad and Ors. (supra), the Hon''ble Supreme Court, while considering a case u/s 397 of the Act,

observed, ''...Mala fides, improper motive and similar other allegations, it is trite, must be pleaded and proved as envisaged in the Code of Civil

Procedure. Acts of mala fides are required to be pleaded with full particulars so as to obtain an appropriate relief.''

We have considered the record, the submissions made by the learned advocates and the above referred judgments. We agree with Mr.

Rakesh Gupta. The respondent No. 3 had entered into an agreement with the Company and its Managing Director, the respondent No. 2, for

development of the land bearing Municipal No. 79 and for the construction of the commercial complex ''Yashvant Plaza''. The respondent No. 3 is

neither a member of the Company nor he has any connection whatever with the dispute between the appellant on one hand and the Company and

the respondent No. 2 on the other hand. The appellant could not have and has not pleaded a case of oppression against the respondent No. 3 nor

did he claim any relief against the respondent No. 3 in the petition before the Board. In our view, the respondent No. 3 was not a proper party in

the petition u/s 397 of the Act filed by the appellant. The respondent No. 3 has been unnecessarily dragged into the present litigation. In our

opinion, the Board ought to have accepted the plea of the respondent No. 3 and ought to have discharged the respondent No. 3 from the array of

the party respondents.

As to the maintainability of petition under Sections 397/398 of the Act, it is true that on the date of the petition the appellant did not hold

required 10% of the shares in the Company. But, as recorded hereinabove, originally the appellant had been allotted 50% of the shares in the

Company. Out of the said shares held by the appellant, he sold away 50% of the shares to Durgesh Shukla and Sanjay Shukla, the sons of the

above referred Vishnuprasad Shukla. Thus, the appellant''s holding was reduced to 25% by his own action. However, the appellant''s holding was

further reduced to less than 10% by an illegal act of the Company and the respondent No. 2 of increasing the authorised share capital of the

Company and of making clandestine allotment of additional shares to the respondent No. 2 or the members of his family. In our opinion, reduction

in the appellant''s holding to less than 10% by dubious acts of the Company and the respondent No. 2 is of no consequence. That would not dis-

entitle the appellant from availing of the remedy under Sections 397 and 398 of the Act.

It is true that the appellant and the members of his family did not remain present in three consecutive meetings of the Board of Directors of the

Company. Section 283 of the Act provides for vacation of office by directors. Clause (g) of Sub-section (1) thereof refers to absence of a director

from three consecutive meetings of the Board of Directors or from all the meetings of the Board for a continuous period of three months,

whichever is longer, without obtaining leave of absence from the Board. Hence ordinarily, unless he is granted the leave of absence, a director

would cease to hold office if he abstains from attending the board meetings three times in a row or for continuous period of three months.

However, in the present case, it is the specific plea of the appellant that he or the members of his family were not given notice of meeting of the

Board of Directors. In other words, they were restrained from attending the meetings of the Board of Directors. The specific allegation has not

been answered either by the Company or by the respondent No. 2. Before us, learned advocate Mr. Nanavati has candidly admitted that neither

the allegation has been denied nor there is any material on record to show that the notice of meetings was indeed given to the appellant and the

members of his family.

In the above fact situation, we are of the opinion that the Company and the respondent No. 2 connived to ensure that the appellant and the

members of his family did not attend the meetings of the Board of Directors of the Company. In such meetings, the Company increased its share

capital and allotted the additional shares to the respondent No. 2 and his son. Such allotments were made obviously with an intention to reduce the

appellant to a frail minority. There could not have been a worse case of oppression. The Board has rightly set-aside the allotment of 18876 shares

(2876, 14000 and 2000) made on 24th November 2003, 14th July, 2005 and 27th July, 2005.

In view of its finding of oppression, the Board ought to have given complete relief to the appellant. The Board has stopped short from granting

the complete relief. We are also of the opinion that the Board has rightly not entertained the complaint in respect of the allocation of shops and

offices and the proceeds received from such transfer. That is the subject matter of the arbitration pending before the arbitral tribunal.

In above view of the matter, we partly allow the O.J. Appeal No. 245/2007. We hold that the Company and the respondent No. 2 prevented

the appellant and the members of his family from attending the meetings of the Board of Directors of the Company. We also hold that the appellant

and the members of his family have been removed by the Company and the respondent No. 2 from the office of the Directors surreptitiously. The

Company and the respondent No. 2 connived to increase the share capital at such meetings and clandestinely allotted additional 18876 shares to

the respondent No. 2 and his group with a view to reducing the respondent No. 2 and his group to a flimsy minority. We confirm the order of the

Board ''...to set aside allotment of shares made on 24.11.2003, 14.7.2005 and 27.7.2005 totalling to 18876 (2876, 14000 and 2000), the

allotment is declared null and void and status quo ante is restored.''

We further direct that the respondent No. 2 and the members of his family will, within three months from today, refund the amount of dividend

received by them on the aforesaid 18876 shares to the Company. The action of the Company and its Board of Directors in removing the appellant

and the members of his family from the office of the Directors is held to be illegal and is set-aside. The appellant and the members of his family are

restored as the Chairman and Joint Managing Director and the Directors of the Company.

In view of the above judgment and the directions, the O.J. Appeal No. 254/2007 preferred by the Company and the respondent No. 2 is

dismissed. Civil Applications stand disposed of.

The Company and the respondent No. 2 will jointly bear the cost of the appellant throughout. The appellant Rajendrakumar Tekriwal will bear

the cost of the respondent No. 3 Anandrao Gaekwad. The cost to the respondent No. 3 is quantified at Rs. 15,000=00.

Registry will maintain copy of this judgment in each Appeal.