BEFORE THE COMPANY LAW BOARD, PRINCIPAL BENCH, NEW DELHI 

ARVIND DATAR, MS. CHITRA NARAYAN, D. B. SAXENA, R. SENTHIL KUMAR, Advocates, with SMT. LAKSHMI SUBRAMANIAN, PCS, for the petitioners. 

V. ACHUTHAN, Authorised representative, for respondents 1 and 2. 

S. RAVI, K. MADHUSUDHAN, GUPTA, Advocates, for respondents 4, 5 and 6. 

ORDER 

Date of hearing : 15.9.1999 

BALASUBRAMANIAN, VICE CHAIRMAN - Indag Finance and Guarantee Company Ltd. (the company) in the affairs of which this petition under section 397/section 398 of the Companies Act, 1956 (the Act) has been filed is a closely held company with five shareholders, all family members, the first petitioner and the first respondent being husband and wife and she second petitioner, second respondent and the third respondent being their children. Each holds 20 per cent. shares in the company. This company was originally promoted by the first petitioner and the first respondent to take over a partnership firm consisting of both of them as partners. Both of them were the first directors of the company not liable to retire by rotation. As per article 39(a), the petitioner was to be managing director and Chairman of the company for life. The two sons were inducted as directors sometime in 1993. Due to some family disputes/differences, now the first petitioner and the first respondent are living separately for quite some time. Now the second petitioner is with the father and the second and fourth respondent with the mother. Thus, the petitioner group holds 40 per cent. shares in the company while the respondent group holds 60% shares. The company has a subsidiary by the name of Coromandal Indag Products India Ltd. in which the company holds about 70 per cent. of shares. Through a letter, dated 21.11.1997 (Exh. A-4), the second petitioner informed the first petitioner that the latter had ceased to be a director/managing director by virtue of provisions of section 274 (b) on the ground that the petitioner had been declared as undischarged insolvent by the High Court of Madras. A copy of this letter was addressed to all the shareholders of the company as well as the subsidiary. Further, the respondent shareholders also requisitioned an extraordinary general meeting to transact various businesses and the same was held on 21.4.1998. In this meeting, the second petitioner was appointed as the managing director for a period of five years and two employees of the company were also appointed as directors. These two were also appointed as nominees of the company on the Board of this subsidiary. 

2. Shri Arvind Datar initiating the arguments on the petition on behalf of the petitioner submitted that the company does not have any business other than controlling the affairs of the subsidiary in which it holds 70 per cent. shares and the balance 30 per cent. are also held by various other entities owned by the petitioner's group. Both the companies are family companies in the guise of partnership firms. The second respondent, with a view to take over the control of the company, first engineered a letter to be written to the first petitioner that he had disqualified himself for being a director in terms of section 274 (b). In fact, the IP petition filed against the first petitioner was dismissed by the High Court, the fact of which was fully known to the respondent. Since the articles name the first petitioner as the managing director for life, the only way by which the first petitioner could be removed from his position was by applying the provisions of section 274. Knowing fully well that the provisions of the section cannot be applied, since the IP petition had been dismissed by the High Court, with a view to gain control of the management of the company, the respondents inducted two outsiders who are not family members into the Board of the company in the EOGM held on 21.4.1998. Such induction of outsiders in a family company is by itself an act of oppression, justifying winding up of the company on just and equitable consideration. The very fact that the company is not doing any business other than controlling the affairs of the subsidiary, there is no need to appoint two outside directors. He further submitted that even convening the EOGM Was in violation of the provisions of the Act. When the notice of requisition was received, the same should have been considered in Board meeting. No records have been shown that this requisition was considered in a Board meeting. Further, the requisition contained more than one resolution which is in violation of section 169. Further, no explanatory statement had been enclosed with the requisition. In addition to this, these two persons could have been appointed only as additional directors to hold office only up to the next general body meeting, since no general body meeting had been held after their appointment, they have ceased to be directors on the day on which the general body meeting should have been held. In the same meeting, the 2nd respondent was also appointed as managing director for a period of 5 years. In view of the illegalities in the appointment of the second respondent as the managing director, the petitioner filed a criminal case against the second respondent under sections 205, 406 and 500 of the Indian Penal Code and the matter is pending before the Metropolitan Magistrate. He referred to V. G. Balasundaram v. New theatres Carnatic Talkies (P) Ltd. (1995) 3 Comp LJ 231 (Mad): (1993) 77 Comp Cas 324 (Mad), in which the scope and application of section 169 and section 173 has been discussed in detail and has been held that violation of the provisions would invalidate the meeting held and the decision taken thereat. Accordingly, he prayed that the decisions taken in the EOGM held on 21.4.1998 should be declared as null and void and that there should be a permanent injunction against holding of any EOGM and status quo ante that the first petitioner as the managing director be restored. 

3. Shri Achuthan, appearing for the respondents, submitted that the petitioners have unnecessarily brought in the name of the subsidiary which is not relevant to the facts of this case. He submitted that when the shareholders exercised their rights to convene an EOGM and take appropriate decisions, the same cannot be considered to be oppressive. According to him, proper notices were issued to all the members for this meeting as per law, but the petitioners chose not to attend the meeting inasmuch as they were in minority. Even assuming that there had been certain irregularities in convening and holding of the EOGM, the shareholders can always rectify those defects in the next EOCM. The law does not recognise the issuing of any permanent injunction against the exercise of statutory right in requisitioning a general body meeting. He further stated that in case of requisitioning meetings, there is no need for explanatory statement as decided in Life Insurance Corporation of India v. Escorts Ltd. (1986) 1 Comp LJ 91 (SC) : (1986) 59 Comp Cas 548 (SC). He further submitted that the petitioners have not made out a case for winding up of the company, no public interest is involved and as such invocation of provisions of section 397 is unwarranted. OA Relying on Foss v. Harbottle (1843) 2 Hare 461, he submitted that a majority decision in the interest of the company cannot be questioned by a minority. The petitioner in his capacity as the managing director never convened any general body meeting of the company, and that is the reason the shareholders decided to requisition a general body meeting. Further, he submitted that in terms of the articles of association, the company could have 12 directors and no share qualification has been rescribed by the articles to become a director. Since there could be a deadlock in the Board meeting in view of two directors representing each group, to avoid deadlock in the Board meeting, two more directors were appointed. The two employee directors were appointed only with a view to give the employees a representation on the Board. In other words, he submitted, whatever was done was only for the benefit of the company and as such, he prayed for dismissal of the petition. He further pointed out that the resolutions passed in that meeting have not been given effect to in view of the orders passed by this Bench on 18.4.1998 in which while permitting the holding of the meeting, the Bench had directed that the resolutions passed in that meeting should not be given effect to till the disposal of the petition. 

4. We have considered the pleadings and arguments of the counsel. Considering the relationship between the parties, we advised both the groups that they should try to resolve the disputes amicably and accordingly, an order was passed on 6.7.1998 as follows : 

"In view of the family nature of the company, and that there are other family disputes between the parties, we have advised the counsel for both the sides to resolve the disputes amicably by which they part ways. Both the counsel are agreeable to explore the possibilities of amicable settlement. Accordingly, both will exchange, within a week from today their proposal and later discuss among themselves to arrive at a mutually acceptable solution, failing which they will submit their proposal to us on 5.8.1998 at 2.30 p.m. to enable us to examine the same. 

In the meanwhile, the respondents will file their counter by 20.10.1998 and rejoinder will be filed by 1.8.1998. In case the matter cannot be resolved amicably, the petition will be heard on 5.8.1998." 

5. After this date, a number of hearings took place and the possibility of amicable settlement was discussed. Unfortunately, the parties could not come to any settlement and accordingly, the petition was heard on merits on 15.9.1999. 

6. There are only two main allegations in the petition. One is about the stand of the 2nd respondent that the first petitioner had vacated his office in terms of section 274 (b) and the other, on the various resolutions passed in the EOGM held on 21.4.1998, more particularly, with reference to induction of two employee directors as also appointment of the second respondent as the managing director. Even though, this company was incorporated as a private limited company, it became a public limited company by virtue of section 43A. The counsel for the respondent did not argue on the issue relating to vacation of office by the first petitioner in terms of section 274 (b). We have on record a certificate issued by an advocate wherein he has specifically certified that the IP petition filed against the first petitioner had been dismissed by the High Court. If that be the case, the petitioner has not attracted the provisions of section 274 (b). Since as per the articles, he is the managing director for life, he will continue to function as the managing director. 

7. In regard to the legality or otherwise of the convening and holding of the EOCM on 21.4.1998, it is to be noted that in a section 397/ section 398 petition, it is not the legality or otherwise of an action is normally examined the prime concern could be considered to be an act of oppression. It is on record that the company took over the partnership business and the 1st petitioner and the 1st respondent incorporated this company. Both were the original directors. Later, the two sons, viz., the 2nd petitioner and the 2nd respondent were appointed as directors. It seems that there was a family settlement in the form of an MoU, dated 18.3.1994 by which the affairs of the various group companies were to be managed. After the induction of the two directors, there was parity in the Board - two of the petitioners and two of the respondents. Any disturbance in the Board resulting in marginalisation of one group has to be considered as an act of oppression in a family company like the respondent company. Therefore, irrespective of the fact whether the EOCM was properly convened and held, the complaint of the petitioners that the appointment of two additional directors in that meeting is an act of oppression is justified. In regard to the appointment of the 2nd respondent as the managing director, perhaps, it was done on the ground that the 1st petitioner had disqualified himself to be a director/ managing director in terms of section 274 (2). Since we have already held that the 1st petitioner is not disqualified and would continue to be the managing director, the appointment of 2nd respondent as the managing director especially when the company does not carry on any business has to be declared as invalid and accordingly we do so. Since as per our directions, the resolutions passed on the EOCM have not yet been given effect to, we direct that these resolutions, having been declared as invalid, will not be given effect to. 

8. We are conscious of the fact that the above directions which would result in the Board having two directors from each group are likely to result in a deadlock. In a section 397/section 398 petition, one of the basic principles is that the interest of the company should be protected. We find that the main concern of both the groups relates to the affairs of the subsidiary, viz., Coromandal Indag Products India Ltd., which is obviously doing well. Any dispute in the respondent company is likely to affect the affairs of the subsidiary in which the company holds 70% shares and the balance by finance companies controlled by the family. Since the company holds 70% shares in the subsidiary and since there are only 5 shareholders in the company, we consider it appropriate to give the option to the petitioners for distribution/transfer of these 70% shares to the individual names of the petitioners at 14% each so that there will be equitable distribution of one of the main assets of the company. In case the petitioners choose this option, they will issue a notice to the company within 30 days from the date of this order, and the company will transfer 14% shares to each of the petitioner within 30 days thereafter. In addition, we also give the option to the petitioners, who are in minority, to go out of the company by selling their shares to the respondents/company on a valuation to be made by an independent valuer. This option should also be exercised within 30 days from the date of this order. Both the options are independent of each other and the petitioners are liberty to choose either both or one of them. Once the petitioners exercise their option, the same will be binding on the company and the respondents. Once the petitioners exercise either or both the options, the directions contained in para 7 above will lapse. For the purposes of appointment of a valuer, the parties may approach us with an application. 

9. The petition is disposed of in the above terms with no order as to cost. Liberty to apply is given to both the parties.