BHARAMGOUDA ADGOUDA PATIL Vs. SANJAY FOUNDERS P. LTD.

JUDGEMENT

(1.) THIS Company Petition No. 17 of 2007 has been filed by Shri Bharamgouda Adgouda Patil and others under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as "the Act") against M/s. Sanjay Founders P. Ltd. and others alleging certain acts of oppression and mismanagement, the main relief sought being cancellation of transfer of 536 shares allegedly done on March 25, 2003 and rectification of the register of members; petitioner No. 3 to be declared as a continuing director; appointment of respondents Nos. 5 and 6 and the resolutions made in board meetings and annual general meetings be declared as null and void, etc. M/s. Sanjay Founders P. Ltd., was incorporated on February 26, 1975, having its registered office at Station Road, Ganganagar, Ichalkaranji, District Kolhapur, Maharashtra with the main objects to manufacture, cast process, melt, etc., having all kinds of malleable centrifugal and shell mould castings, all types of work in this regard carried out at the factory premises at Ichalkaranji in Maharashtra. Its authorised share capital is Rs. 5,00,000 divided into 5,000 equity shares of Rs. 100 each, the issued, subscribed paid -up share capital of the company being Rs. 2,81,100 divided into 2,811 shares of Rs. 100 each. Respondent No. 1 company was formed on February 26,1975, to take over the business of Sanjay Founders, a partnership firm (Shri Sanjay S. Bidkar (petitioner No. 4), Shri B. A. Patil (petitioner No. 1), Shri B. B. Minajagi (respondent No. 3) were partners of Sanjay Founders). Shri Sanjay Bidkar was a minor partner and, therefore, on takeover of the business of the firm, shares were allotted to his father, viz., Shri Shankarrao Bidkar and other two partners, viz., Shri Patil and Shri Minajagi. The promoters of the company were late Shri Shankarrao M. Bidkar, Shri B. A. Patil and Shri B. B. Minajagi who had subscribed for one equity share of Rs. 100 each.

(2.) SHRI Mahesh Athavale, company secretary appearing for the petitioners, pointed out that respondent No. 1 company is a quasi -partnership; composition of the board of directors has been changed without proper procedure; there has been change in the shareholding pattern by transferring the shares illegally; the respondents have siphoned off the money; the petitioners have been oppressed by not paying dues to them and by not transmitting the shares. It was pointed out that despite the Company Law Board's directions the petitioners have not been granted full inspection despite being 46.71 per cent shareholders in respondent No. 1 company. To prove that respondent No. 1 is a quasi -partnership, it was contended that: "the true character of the company and other relevant factors shall be considered for the purpose of grant of relief having regard to the concept of quasi -partnership" (Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., [1981] 51 Comp Cas 743 (SC) refers): "Where the test for quasi -partnership was laid down the hon'ble Bench did not insist on the incorporation of the clause mentioned by the respondents in the memorandum" (R. Khemka v. Deccan Enterprises P. Ltd. : [1998] 5 Comp. LJ 258 : [2000] 100 Comp Cas 211 (AP)) and "It was held that it is not necessary to have equal percentage. Even ten per cent shareholder is entitled for participation in the management" (Richards v. Lundy, [2000] 1 BCLC 376 (Ch. D) refers). It was pointed out that the main relief sought is cancellation of transfer of 536 shares from the name of Shri Shankarrao Bidkar to the names of respondent No. 6, respondent No. 7, respondent No. 8 and respondent No. 9 (three brothers and sister -in -law of the deceased) to the deceased legal heirs and accordingly rectification of the register of members. It was contended that transfer and transmission of shares in number of cases has been done without following proper procedure for transfer and transmission of shares to gain unlawful control of the majority shares of the company. The petitioners have not been given the details of such transfer. Petitioner No. 3 intimated to the respondent on June 27, 2006, about the loss of shares certificate. Late Shri Shankarrao Mahadeo Bidkar was holding 671 equity shares. Late Shri Shankarrao Mahadeo Bidkar expired on January 20, 2005. The petitioners as legal heirs of late Shri Shankarrao intimated to respondent No. 1 about loss of these share certificates. It is understood that the brothers of late Shri Shankarrao Bidkar wrote a letter to the company sometime in 2004 claiming that 671 shares were distributed between the brothers. They also claimed the dues payable to late Shri Shankarrao M. Bidkar should be paid to them. Late Shri Shankarrao Bidkar, who was the father of petitioners Nos. 3, 4, 6, and 7 and husband of petitioner No. 5 continued as the chairman and director of the company from its incorporation till January 20, 2005, when he died. Late Shri Shankarrao Bidkar was ill since December, 2002 and could not effectively contribute in the business activities of the company, therefore, petitioner No. 3 was appointed as the director of the company on or about June 7, 2003. The original shares at the time of incorporation of respondent No. 1 ought to have been allotted and issued to Shri Sanjay Bidkar that is petitioner No. 4 who at the time of takeover of the partnership firm was a minor and attained majority only on April 16, 1980. However, the shares were then erroneously allotted and issued to late Shri Shankarrao Bidkar. After late Shri Shankarrao Bidkar expired, the legal heirs started enquiring about the shares held by their father, the respondents never bothered to supply any information. Certified true copy of the annual return for the year 2003 revealed that the annual general meeting for the calendar year 2003 was held on December 29, 2003, the annual return indicated that on March 25, 2003, 536 (134 shares each) were transferred to respondents Nos. 6 to 9 illegally. It was contended that no notice, agenda of board meetings and minutes of the board meetings were provided to the petitioners, who are the directors, promoters of the company. My attention was brought to the share transfer forms for the alleged share transfers and it was pointed out that the date of presentation of share transfer form before the prescribed authority is December 27, 2002. As per Section 108 these transfer deeds are valid only for two months from the date of presentation to the prescribed authority, i.e., till February 26, 2003. However, the date of execution of the transfer deeds which appears to have been written as March 25, 2003, was overwritten as May 12, 2003, which is clearly beyond the validity period. This mistake was not even rectified by revalidating the share transfer forms. In Mannalal Khetan v. Kedar Nath Khetan, [1977] 47 Comp Cas 185 (SC), it was held that the provisions in Section 108 are mandatory in character and registration of share transfers contrary to the provisions would be illegal. Further, the date of payment of stamp duty is May 12, 2003. The stamp duty has been paid by way of franking in contradiction with Section 11(e) of the Indian Stamp Act, 1899, which states that the transfer of shares in any incorporated company shall be stamped with adhesive stamps bearing work "share transfer" unless there is short supply of stamps. Article 11 of the articles of association of the company states that no shares shall be transferred unless right of preemption is given to the existing shareholders. The procedure for transfer of these shares as prescribed in the articles Nos. 8 to 21 of the articles of association was never followed by respondent No. 1. Further, the transfer of shares was not approved in the board meeting. In fact no board meeting was held on March 25, 2003. The last board meeting in the year 2002 was held on December 25, 2002. Thereafter, the board meeting was held on March 15, 2003 and then on June 7, 2003. All these minutes refer to the dates of the earlier board meetings and, therefore, there cannot be any meetings in between. It was held in John Tinson and Co. P. Ltd. v. Mrs. Surjeet Malhan : [1997] 88 Comp Cas 750 (SC), that the concept of previous sanction of the directors connotes that there should be a written resolution accepting the transfer. In the absence of such an action the share transfer was held to be not valid in law. Further, franking has been done on May 12, 2003, on the share transfer forms instead of affixing share transfer stamps. As required by Section 108 the transfer deed has to be stamped before it is presented to the company for transfer of shares. It is impossible that the transfer deeds with a date of stamping (franking) in May, 2003 were presented to the board in March, 2003 and the transfers were approved in March, 2003 itself. The consideration in words has not been mentioned on the transfer deed. The amount written in figures appears to be the fact value of the shares while the intrinsic value of these shares was far more than the face value. Therefore, it was argued, it is inconceivable that the transfer would be made for a face value. Late Shri Shankarrao Bidkar's thumb impression appearing on the said share transfer forms is fake. The alleged thumb impression has not been attested by any competent authority. The transfer deeds are without any witness. It would be interesting to observe that late Shri Shankarrao Bidkar has signed minutes of the board meeting held on June 7, 2003. This is a date much later than putting the alleged thumb impression on the transfer deed which obviously means that till that date he was able to sign and was signing as such. The question is why should he put his thumb impression on the alleged transfer deed much before that. Petitioners Nos. 3 to 7 say that the thumb impression is not of late Shri Shankarrao Bidkar. All these facts prove that the alleged transfer of shares from late Shri Shankarrao Bidkar to his brothers is concocted and illegal. It is alleged that the said 536 shares held by late Shri Shankarrao Bidkar were transferred to the legal heirs of Shri Mahadeorao Bidkar pursuant to the agreement between all the legal heirs of Shri Mahadeorao Bidkar. The alleged agreement states that the 671 equity shares held by Shri Mahadeorao Bidkar, though held in his individual name, are in fact deemed to be held by all the legal heirs of Shri Mahadeorao Bidkar. It was argued that assuming without admitting that this is true, in such situation it was necessary to comply with the provisions of Section 187C of the Companies Act, 1956, regarding declaration to be given by persons not holding beneficial interest in the equity shares. The non -compliance of the said section, i.e., absence of any such declarations given by Shri Shankarrao Bidkar and his brothers and by the company proves that there was no such intention on the part of Shri Shankarro Bidkar and this raises serious doubts about the authenticity of the agreement. To prove eligibility of petitioners Nos. 3 to 7, it was contended that: "legal heirs are entitled to file a petition alleging oppression and mismanagement." (Rajkumar Devrajv. Jai Mahal Hotels P. Ltd. C.A. No. 133 of 2006 in C. P. No. 30 of 2006 : : [2006] 134 Comp Cas 405 (CLB) )refers.

(3.) FURTHERMORE , it was contended that as contemplated by clause 38(1) of the articles of association, the annual general meeting is required to be convened by giving 21 days' notice. The company on September 21, 2006, has sent the notice of the 32nd annual general meeting along with the director's report and annual accounts, etc. This obviously means that the meeting of September 30, 2006, was not properly convened with appropriate length of the notice. Article 38 provides that 21 days' notice is necessary for the annual general meeting. Further, it will be observed that the balance -sheet of March 31, 2006, could not have been signed before September 20, 2006, since the board meeting to adopt/approve the annual accounts was held on September 20, 2006, which itself says "to fix up the day and date of annual general meeting" as an item on the agenda. This further confirms that the annual general meeting was not properly convened with full length of notice. It was pointed out that the auditors have signed the balance -sheet and report on September 7, 2006, while the director's report was signed on September 20, 2006. Vide letter dated December 14, 2006, respondent No. 1 had informed petitioner No. 3 that with effect from the date of the annual general meeting alleged to have been held on September 30, 2006, he was no more a director of the company and had retired as a director. A copy of Form No. 32 for retirement of petitioner No. 3 was also attached to the said letter. It was argued that this again shows the mala fide intentions of the respondents to oust the petitioners from the management of respondent No. 1. Petitioner No. 4 was working in the marketing department of respondent No. 1 since December 1, 1996, suddenly he was removed from employment without justifiable reasons and without following the procedures with effect from January 1, 2004. This removal was an act of the process of ousting the petitioners from the management and to make them disassociate from the working of the company.