GIRISH S MEHTA Vs. TRACSTAR INVESTMENT LIMITED

JUDGEMENT

(1.) ALL these appeals arise against the order in Company petition No. 3/111 (4) SRB/94. Except C. M. A. No. 132 of 1996, all the other appeals are preferred by the various respondents in the company petition. C. M. A. No. 132 of 1996 is filed by the petitioner in respect of that portion of the finding which went against them. For the sake of convenience, the reference to the parties hereafter will be according to their rank before the Company Law board. <PARA> In its first meeting after the board of directors was reconstituted on June 2, 1994, the following subjects came for discussion and resolutions were passed by the second respondent as under : It was reported to and noted by the board that the share certificate No. 47768 for 5, 00, 000 equity shares of Rs. 10 each fully paid-up of Gordon Woodroffe Ltd. , registered in the name of the company, bearing distinctive Nos. 02617978 to 03117977, both inclusive, has been lost, as the share certificate has been illegally removed from the custody of the company and taken away by a person claiming to have control over Tracstar Investments pvt. Ltd. Accordingly, it was necessary to submit an application to the said gordon Woodroffe Ltd. for issue of duplicate share certificates, together with a deed of indemnity ; a draft whereof, was tabled for the board's consideration and approval. It was also reported to and noted by the board that it was necessary to have the above holding of the company sub-divided in the lots of rs. 1, 75, 000 shares, 1, 75, 000 shares and 1, 50, 000. In this connection the following resolutions were passed by the board : "resolved that Mr. M. S. A. Kumar, Mr. K. K. Banerjee and Mr. A. Syed Ahamed, directors, be and are hereby severally authorised to make an application to Gordon Woodroffe Ltd. , 36, Rajaji Salai, Madras 600 001, for the issue of duplicate share certificate in lieu of share certificate No. 47768 lots, in respect of 5, 00, 000 equity shares, bearing distinctive Nos. 2617978 to 3117977, both inclusive, and also to apply for sub-division of the said 5, 00, 000 equity shares, in the lots of 1, 75, 000 shares, 1, 75, 000 shares and 1, 50, 000 shares. Further resolved that the deed of indemnity proposed to be executed by the company in favour of Gordon woodroffe Ltd. in connection with the issue of duplicate certificates as hereinbefore mentioned ; a draft whereof tabled at this meeting, be and is hereby approved, and that Mr. M. S. A. Kumar, director, be and is hereby authorised to execute the same for and on behalf of the company. " * It is seen that on the same date, namely, June 2, 1994, the second respondent wrote a letter to the first respondent, to issue a duplicate certificate. An indemnity bond was also sent to the first respondent. On June 3, 1994, the second respondent again held a board meeting, and it was resolved that : "resolved unanimously that 5, 00, 000 equity shares of Rs. 10 each, fully paid-up Gordon Woodroffe Ltd. , 36, Rajaji Salai, Madras 600 001, bearing distinctive Nos. 02617978 to 03117977, both inclusive and registered in the name of the company, be sold and disposed of, at the best available market price, but at a price not below Rs. 12. 75 per share, net of brokerage, if any, and that Mr. M. S. A. Kumar, director, who failing Mr. M. M. Gupta, director, be and is hereby severally authorised to sign the requisite transfer deeds, for and on behalf of the company. " * On June 4, 1994, the first respondent again held a board meeting, and it was resolved thus : "resolved to issue a new certificate bearing No. 48177 (for 1, 50, 000 shares), No. 48178 (for 1, 75, 000 shares) and No. 48179 (for 1, 75, 000 shares) under its common seal, in the name of Shoe Specialities pvt. Ltd. in lieu of original certificate No. 47768 as recorded in the register of loss of certificate, tabled at the meeting. " * Respondents Nos. 17 to 19 seem to have purchased the shares and their names were entered in the registers. The company petition was filed challenging the above actions of respondents Nos. 1 and 2 by the petitioners under section 111 of the Companies Act whereby they prayed for the following reliefs after issuing notices to the sixteenth respondent on June 11, 1994, and June 14, 1994, asking for particulars : " (a) To declare that the transfer of shares said to have been effected by respondent Nos. 10 to 15 for and on behalf of SSPL in respect of 5, 00, 000 shares held by SSPL in Gordon Woodroffe Ltd. bearing distinctive Nos. 02617978 to 03117977, covered by folio No. GLS 05348, certificate No. 57768 as non est in law, illegal, fraudulent and invalid in law, as being violative of section 108 (1) of the Companies Act, section 4 (3) of the Companies (Issue of Share Certificates) Rules, 1970, and section 22a (4) of the SCRA and not binding on the company and/or the petitioners. . . . " * The material averments in the petition are as follows : The late Dwarakadoss Chhabria had two sons, R. D. Chhabria (R. D. C.) and M. D. Chhabria (M. D. C. ). R. D. C. had two sons, namely, m. R. Chhabria (M. R. C.) and K. R. Chhabria (K. R. C. ). In this case, we are concerned with the dispute between M. R. C. on the one hand and R. D. C. and M. D. C. on the other. The Chhabria family was controlling various companies. M. R. C. is having control over the Shaw Wallace group of companies, and R. D. C. and M. D. C. are having control over the second respondent. One of the members of the family, namely, K. R. C. (named above), was a non-resident Indian. He contributed substantially to the growth of the companies while he was abroad till 1984. The family gained control over the shareholdings of R. G. Shaw and Co. Ltd. in Shaw Wallace Co. and, in the year 1984, K. R. C. was required to go over to India by his brother M. R. C. to secure and completely take over control of Shaw Wallace and Co. It is seen that k. R. C. gave up his non-resident Indian status under the Foreign Exchange regulation Act and income-tax laws. In view of this, M. R. C. was the only member of the M. R. C. family who was having control over Shaw Wallace Co. but also the other Shaw Wallace group of companies abroad, as, under the provisions of FERA, a non-resident Indian cannot acquire or hold assets abroad, without the permission of the Reserve Bank of India. It is seen that there was some oral understanding between the members of the Chhabria family whereby it was agreed that M. R. C. would own and control most of the companies of the chhabria group, which includes Shaw Wallace Co. and its subsidiaries. Others were given control of distillery companies which included Tracstar Investments Pvt. Ltd. and Gordon Woodroffe Ltd. (GWL ). In these companies, the majority shares were held and owned by M. D. C. and R. D. C. As a consequence of this arrangement, K. R. C. was relieved of his obligations given under bank guarantee in favour of Hongkong Bank. It is seen that M. D. C. , and R. D. C. , had good business in beverages, and this was not liked by M. R. C. It is alleged that due to the development of the companies owned by M. D. C. and R. D. C. , M. R. C. was perturbed. He decided to do everything within his reach to go back on the family arrangement and with that intention, some time in April, 1993, M. R. C. decided to undo all that had been done from April, 1990 to september, 1991, in pursuance of the family arrangement. He began to claim that all the companies including GWL, Tracstar, etc. , belonged to him and to SWC, and not to any other Chhabrias. It began as a family dispute, and became a news item, and finally the same was converted into a corporate battle. It is seen that from April, 1992, onwards, the dispute which began as a family dispute, ended in dispute over the ownership and control of the companies. On April 22, 1992, a notice was issued on behalf of M. D. C. and R. D. C. regarding their rights in the second respondent/company, and their apprehension regarding the interference by M. R. C. and his people. The reason for the apprehension was that the second respondent-company was controlled by a board of directors who were employees of SWC owned by M. R. C. The notice requested the board of directors to desist from exercising their powers in a manner which prejudices or undermines the interest of the shareholders of the company. SWC owned by M. R. C. filed an application before the Company Law Board as C. P. No. 19 of 1992 under sections 247 and 250 of the Companies Act. One of the main reliefs sought in that case was, to investigate into the persons who held the shares in the second respondent-company. That application is dated May 5, 1992. It was alleged in that petition that M. R. C. wanted to interfere with the rights of standard and Stridewell in the second respondent-company. The second respondent was manufacturing shoeuppers and had been manufacturing the same through GWL. GWL was being managed by the board of directors which controlled the employees of SWC. The second respondent was also being managed by a board of directors which essentially consisted of employees of SWC or its consultants or its constituents. Thus, the persons who managed the second respondent were obliged to M. R. C. by virtue of their jural relationship, and the employees were dependent on M. R. C. It is further averred that M. R. C. , emboldened by the jural and fiduciary relationship between him and the directors of respondents nos. 1 and 2, was inspired by the fact that the directors will dance to his tune and, therefore, abused his position. They wanted to wrest control over the second respondent-company. With that intention, M. R. C. ignited the series of fraud, first by unauthorisedly increasing the share capital of the second respondent from 5, 000 to 25, 000 shares and again illegally allotted an enhanced capital of 20, 000 shares to Bhankerpur Shimbhaoli Beverages Pvt. Ltd. , which in turn created a pledge in favour of Malleswara Finance and investments Pvt. Ltd. The enhancement of the capital, issue of allotment of the same and the subsequent pledge were questioned and a company petition was filed as C. P. No. 29 of 1992 by M. D. C. and R. D. C. , before the Company Law Board. That was on July 15, 1992. In Company Petition No. 29 of 1992, an interim application was also filed, to restrain the second respondent herein from alienating its shares in the first respondent-company. On August 20, 1992, counsel for the second respondent undertook not to alienate its shares in the first respondent's company. On May 20, 1993, the Company Law Board passed an order whereby the issue of allotment of 20, 000 shares was set aside and a direction was also issued to rectify the registers. In spite of the order, the board of directors did not comply with the direction and, therefore, on August 2, 1993, another application, namely, C. P. No. 44 of 1993 was filed by M. D. C. and R. D. C. complaining of continued oppression by the directors of the second respondent, who were employees of SWC. Against the order of the Company law Board in C. P. No. 29 of 1992, Malleswara Finance and Investment Co. Pvt. Ltd. filed a writ petition before this court as W. P. No. 19256 of 1993. It came before a learned single judge for admission, and the order of the Company law Board dated May 28, 1994, was stayed. In the meanwhile, C. P. No. 44 of 1993 filed by M. D. C. and R. D. C. for giving relief against the continued oppression, came for consideration, and, in view of the stay order passed by this court in the writ petition, the Company Law Board also reserved its orders after the disposal of the stay petition. On May 10, 1994, the writ petition filed by Malleswara Finance and Investment Co. Pvt. Ltd. was dismissed. In the meanwhile, some of the respondents in C. P. No. 29 of 1992 filed C. M. A. before this court as A. A. O. Nos. 743 of 1993 and 875 of 1994. Against the dismissal of the writ petition, Malleswara Finance and Investment Co. Pvt. Ltd. filed Writ Appeal No. 806 of 1994. The writ appeal as well as the appeals against the order in C. P. No. 29 of 1992 were heard and disposed of. The judgment dated September 27, 1994, is reported in Malleswara Finance and investments Co. P. Ltd. v. Company Law Board 1995 (82) CC 836, 1995 (1) CLJ 1, 1995 (1) Complj 1 When the attempt of M. R. C. to increase the share capital in the second respondent-company failed, another attempt was made by him to sell its shares in the first respondent-company in which the first petitioner claimed some right. For the said purpose, M. R. C. issued direct instructions to the board of directors to dispose of the shares held by the second respondent in the first respondent, to third parties. Since there was already a judgment against the board of directors, in C. P. No. 29 of 1992 which was subsequently confirmed by this court, these directors expressed their dissent and, therefore, it is alleged that M. R. C. wanted those directors to resign their post, and, immediately, after the resignation, his own employees were appointed as additional directors and later inducted as directors by M. R. C. It is said that the same was done June 1, 1994, and June 2, 1994, and in the first meeting itself, in its board meeting, it was decided to obtain duplicate certificates and, thereafter, sell the same to third parties. It is averred that the resolution to get duplicate certificates and to sell the same to third parties and subsequent purchase by respondents Nos. 17 to 19 is invalid. The main reasons mentioned in the petition are (1) that it is against the undertaking filed by counsel in C. P. No. 29 of 1992 ; (2) that the appointment of the board of directors is against law and they have not formed any opinion in good faith either to issue duplicate certificates or for selling the same ; and (3) before issuing duplicate certificates, the relevant provision of law had not been applied, and no attempt was made to get the original. It is also contended that the above acts are the result of collusion between the directors of respondents Nos. 1 and 2 companies and respondents Nos. 17 to 19. It is not only against the interest of the first petitioner-company but also the other petitioners. The issuance of duplicate certificate is mala fide and is only with an intention to take away the right of the first petitioner in the second respondent-company. It is also said that the board of directors have not applied their mind, nor were they aware of the real state of affairs, and they have acted negligently and they have danced according to the tune of M. R. C. since they were none other than his own employees.

(2.) IN the counter-statement filed by the respondents, it is contended that the petition is not maintainable. It is said that the transfer of shares effected by the second respondent, a member of the first respondent, is in accordance with law, and when the transferor and the transferee had no complaint, the petitioners herein can have no locus standi to challenge the same.

(3.) PALMER's Company Law, volume 1, 23rd edition (1982), chapter 64 deals with "directors" and "fiduciary Duties". At page 850 (Chapter 64-04), the learned author says that directors are under a duty to act bona fide in the best interest of the company. While dealing with the said subject, the learned author further says thus : "although directors'duties are owed primarily to, and are enforceable by, the company and not to individual shareholders, the company is defined in equity usually by reference to the shareholders as a whole and not by reference to the company as an entity distinct from its members. In a celebrated instance, counsel advised that'the expression "the company" did not mean the sectional interest of some (it may be a majority) of the present members, but of present and future members of the company'and that, on the basis that the company has to continue as a going concern, the directors'should balance a long-term view against short-term interests of present members'. A similar view was taken by Megarry J. in Gaiman v. National Association for Mental Health 1970 (2) Aller 362, 1971 (41) CC 929, 1971 Ch 317 when he said : 'the interests of some particular section or sections of the company cannot be equated with those of the company, and I would accept the interests of both present and future members of the company as a whole, as being a helpful expression of a human equivalent.' It may be that when the company is no longer solvent the interests of the company include the interests of its creditors. " * (emphasis supplied) The power to manage the company is vested in them. We may have also to consider what is meant by "collusion". In P. Ramanatha Aiyar's The Law Lexicon, reprint edition 1987, at page 216-i, "collusion" is defined as "a secret agreement for a fraudulent purpose ; a secret or dishonest arrangement in fraud of the rights of another ; a secret agreement by two or more persons to obtain an unlawful object, an agreement between persons to obtain an object forbidden by law, or to obtain a lawful object by illegal means" * . The petitioner's case is that there is a secret and dishonest arrangement between the directors of respondents Nos. 1 and 2, in fraud, which has affected their right. In Wharton's Law Lexicon, 14th edition (1993), at page 212, "collusion" is defined as "to unite in the same play or game, and thus to unite for the purposes of fraud of deception ; an agreement or compact between two or more persons to do some act in order to prejudice a third person, or for some improper purpose. " * In Shrisht Dhawan v. Shaw Bros. 1992 AIR (SC) 1555, 1991 (5) JT 378, 1992 (1) RCJ 339, 1992 (1) RCR 442, 1992 (1) Rentlr 584, 1991 (2)Scale 1386, 1992 (1) SCC 534, 1991 (S3) SCR 446, 1992 (1) UJ 346, 1992 AIR (SCW)1649 their Lordships considered a similar question as to how far fraud and collusion invalidate any decision or action. In paragraph 20 of the judgment, their Lordships said thus : "fraud and collusion vitiate even the most solemn proceedings in any civilised system of jurisprudence. It is a concept descriptive of human conduct. Michael Levi likens a fraudster to Milton's sorcerer, Comus, who exulted in his ability to,'wing me into the easy-hearted man and trap him into snares'. It has been defined as an act of trickery or deceit. . . " *