Om Prakash Baldev Krishan ... vs Ujjwal Sarin
2004 Latest Caselaw 1140 Del

JUDGMENT

A.K. Sikri, J.

1. The respondent herein had filed a petition under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act') against the appellants hereinbefore the Company Law Board (for short 'the CLB') alleging oppression and mismanagement. By the impugned order dated 22 August 2003, two directions which are given are not palatable to the appellants and, therefore, they have filed this appeal. These directions are:

(a) The appellant No. 1 company (hereinafter called as 'the company') shall transmit 1,000 equity shares in favor of the respondent. It may be mentioned that father of the respondent (late) Shri Om Prakash was holding 1,000 shares and after his death, the respondent applied for transmission of these shares in the name of the executor of the Will. The shares were not transmitted purportedly on the ground that the application for transfer of these shares was not proper and validly submitted.

(b) The company had issued rights share to the existing shareholders. As aforesaid 1,000 shares were not transmitted in favor of the respondent/executor and he had not become the owner thereof, he was denied rights share also which was ultimately issued to appellant No. 2 (respondent No. 2 before the CLB). Direction is given by the Company Law Board to cancel the said allotment of the shares in favor of appellant No. 2 and issue these shares to the respondent herein.

2. I may state at the outset that basic objection of the company for non-transmission of these 1,000 shares in favor of the respondent was that 'no objection' certificate from the daughters of the deceased (sisters of the respondent) was not submitted. During the proceedings that certificate is also submitted and, therefore, on 25 August 2004, learned senior counsel for the appellants made a statement that in so far as transmission of these 1,000 shares in favor of the respondent is concerned, needful would be done. Therefore, it is not necessary to discuss the legality of this direction by the Company Law Board. However, some aspects of this issue will have to be discussed to the extent they have bearing on the second direction. Before, I deal with the validity of the second direction, it would be appropriate to take stock of the basic factual matrix of the matter.

3. The company was incorporated in the year 1972 with the main objective to acquire land for the construction of multi-storeyed building and to license flats therein on suitable terms and conditions and to carry on the business in real estate and properties of all kinds. The promoters were (late) Shri Om Prakash and Shri B.K. Abbi and their family members. (Late) Shri Om Prakash and Shri B.K. Abbi were the brothers. (Late) Shri Om Prakash and his wife subscribed 1,000 shares each. Shri B.K Abbi, his wife and son also subscribed 1,000 shares each. Thus family of (late) Shri Om Prakash had 2,000 shares and the family of Shri B.K. Abbi had 3,000 shares. The two groups were accordingly having shareholdings in the ratio of 40:60. The respondent is the son of (late) Shri Om Prakash. Wife of (late) Shri Om Prakash (mother of respondent) died on 1 January 1987 and her 1,000 shares were transmitted in favor of the respondent in the year 1987 itself. Thereafter, Shri Om Prakash also died on 5 June 1991. At that time, the respondent was 16 years of age and, thus, a minor. He pursued his studies and completed his chartered accountancy course in May 2000. 4. The company decided to issue rights share and for this purpose on or about 7 March 2002 it called upon the five shareholders who were having 1,000 shares each, to subscribe for 19,000 equity shares. The respondent was holding 1,000 shares (transmitted to him on the death of his mother) and was allotted 19,000 equity shares by the company. He also requested the company to allot 19,000 equity shares in respect of 1,000 shares held in the name of his late father Shri Om Prakash and enclosed a cheque dated 22 March 2002 for 19,000 towards the share money. However, on the ground that the said 1,000 shares were not transmitted in his favor and, therefore, he had no right to get the 19,000 equity shares against the rights issue, the company allotted these shares to the appellant No. 2, son of Shri B.K. Abbi. At this stage, the respondent filed the aforesaid company petition under Sections 397 and 398 alleging oppression and mismanagement on the part of the appellants herein and asked for the following reliefs:

(i) The Board of directors of the company be reconstituted and he should be made a working director of the company. In support of this relief, he submitted that there had been an unwritten and implied agreement that both the groups would have equal say in the management of the company. His father was a director of the company till his death. However, this trust and mutual confidence was breached by the appellants 2 and 3 in a systematic manner by i not allowing the respondent to participate in the management of the company and after the death of his father on 5 June 1991 he was never allowed to be represented on the Board of directors.

(ii) The company be directed to transmit 1,000 equity shares of his father Shri Om Prakash in the name of executor of the Will on the basis of Will executed by late Shri Om Prakash.

(iii) Allotment of 19,000 equity shares in favor of appellant No. 2 be set aside and these shares be also allotted in the name of executors of the Will.

5. There were certain other minor reliefs claimed in the petition but not pressed before the Company Law Board.

6. The Company Law Board, vide impugned order, granted second and third reliefs, but denied the first one. Since there is no challenge by the respondent against non-grant of the first relief, it is not to be dealt with in these proceedings.

7. It may be stated at the outset that the appellants had challenged the maintainability of the company petition filed by the respondent herein on the ground that there was serious delay and latches [laches]1 of eight years in approaching the Company Law Board and, therefore, he was estopped from asking any relief. This contention has been brushed aside by the Company Law Board in the impugned order. Mr. Chaudhary, learned senior counsel for the appellants had initially challenged the impugned order on this aspect with much vehemence. However, this argument has lost much of its relevance as the question of delay and laches could arise only in respect of first and second reliefs claimed before the Company Law Board. As far as first relief is concerned, it was not granted. As far as second relief of transmission of 1,000 shares in favor of the respondent is concerned, it has been conceded before me. The issue before me is now confined to allotment of rights share in favor of the appellant No. 2 which happened only in the year 2002 and immediately, hereafter, the petition was filed. For this reason, it appears, learned senior counsel did not press this submission of delay and laches when the matter was heard on this aspect finally. Therefore, I shall straightaway come on the validity of this direction.

8. Few more facts will have to be stated dealing with the events that took place while issuing the rights share. As mentioned above, on or about 7 March 2002, the company called upon the five shareholders to subscribe for 19,000 equity shares each as rights shares. This notice was sent to (late) Shri Om Prakash also, as, as per the record of the company, he was still a shareholder. The respondent applied for 19,000 equity shares on the strength of 1,000 shares he is holding which were transmitted to him on the death of his mother. He also requested for issue of these shares in the name of executor of the Will on the basis of the Will vide letter dated 23 March 2002. The request in this letter was contained in the following language:

"This has reference to your letter dated 8.3.2002 addressed to my late father Shri Om Prakash. In this regard, I have to request you to kindly issue 19,000 (nineteen thousand) shares being the rights issue allotment due to my late father in the name of the Executor, Estate of late Lala Om Prakash. The amount payable in respect of the same is enclosed herewith.

This letter has been issued with the concurrence and consent of all the heirs of late Lala Om Prakash.

Should any other legal requirement be necessary, you may kindly revert back to me so that I may comply with such legal requirement, if any."

9. He also enclosed a cheque for Rs. 19,000 for issue of those shares. The company sent reply dated 25 March 2002 requesting for providing the company with a copy of the Will of (late) Shri Om Prakash 'to enable us to act on your request to allot share as to the Executor named in the Will who would hold the shares as trustee for the beneficiary'. He was also asked to provide 'no objection' certificate of the beneficiaries/legal heirs for the allotment of shares in the name of executor of the Will. It was also stated that the document should reach latest by 28 March 2002 as the share capital had to be increased by 31 March 2002 which was the last date for this purpose. The respondent sent reply dated 27 March 2002 enclosing therewith the copy of the Will. It was further stated that the demand for no objection certificate from the legal heirs was not valid as there was no such provision in law that on transfer of shares in the name of the executor, it was the executor who was to account for the estate of (late) Om Prakash and finally to allot/distribute the respective entitlement of the beneficiaries/legal heirs. It was, therefore, maintained that allotment of shares in the name of the executor will suo motu ensure to the benefit of the beneficiaries as per the provisions of the Will and thus NoC was not required. His request was considered in the meeting of the Board of directors and it was decided that his request for allotment of shares could not acceded to. He was accordingly, informed about the same vide letter dated 4 April 2002 and was also returned the cheque. The respondent protested against this move vide letter dated 8 May 2002 dubbing it as a mala fide move on the part of the Board of directors and making it clear that this decision of the board was not acceptable to him. He stated that it Was an unfair method adopted for appropriating those 19,000 shares which not only legally belonged to the estate of (late) Om Prakash but for which even the amount as demanded was tendered. He further stated that although the demand for supply of NoC was legally untenable, yet to protect the interest of his group-he was submitting NoC including that of the executor. He resubmitted the cheque for allotment and asked for allotment of shares in the name of the executor of the Will. However, reiterating the decision already taken, the cheque was returned by the company with its letter dated 18 May 2002.

10. Submission of learned senior counsel for the appellants was that the direction of the Company Law Board is clearly illegal and is violative of Section 81 of the Act read with rules 27 and 28 of Table A Schedule I of the Companies (Court) Rules, 1959. He submitted that Section 81 provides for the manner in which further issue of capital is to be made as per which further shares had to be offered to the persons who, at the date of offer, are the holders of equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date. According to the learned senior counsel, since (late) Shri Om Prakash was still the shareholder, offer was sent to him as per the provisions of Section 81 of the Act.

11. He also referred to provisions of Section 41 of the Act which provide definition of 'Member' and submitted that a person to be a member should be holding equity share capital of the company and whose name is entered as beneficial owner in the record of the depository. His submission was that since in respect of 1,000 shares which was in the name of (late) Shri Om Prakash, as per the record, the owner was still (late ) Shri Om Prakash and the respondent had not become member in respect of these shares and, therefore, was not entitled to any rights share. He also submitted that as (late) Shri Om Prakash was the recorded owner-letter was sent in his name even when the respondent applied for rights share on the basis of Will and he was asked to submit no objection, this was not submitted by him before 31 March 2002 and, therefore, the Board of directors had no option but to refuse the allotment of shares. In any case, it was submitted, his request contained in a letter dated 23 March 2002 could not be entertained as shares cannot be allotted to the executor of the Will.

12. After giving my thoughtful consideration to these submissions, I am of the opinion that the aforesaid contentions of learned senior counsel for the appellants are of no avail and, in the facts and circumstances of the case, direction given by the Company Law Board for allotment of 19,000 shares in favor of the respondent is proper, legal, equitable and valid. We have to keep in mind that it is a closely held company by members of the two families. It is in the nature of a quasi-partnership. From the very beginning, shareholding of the company was in the ratio of 40:60 between the two groups. This ratio was maintained when mother of the respondent died and her shares were transmitted in favor of the respondent. When father of the respondent died on 5 June 1991 he was only 16 years of age. Thus when he was still a minor, he had lost both his parents. Other group is headed by his uncle and there is therefore, a kind of fiduciary relationship or trust which the respondent could repose in his uncle and uncle's family.

13. Another significant factor which needs mention at this stage is that there were, certain other businesses of the family and shares in all those businesses were transferred in favor of the respondent in November 1991. This fact pleaded by learned counsel for the respondent at the time of arguments was not denied by the appellants' counsel. It was also submitted that no application for transmission of shares was given. The respondent, therefore, in good faith nurtured the feeling that whatever were the rights of his late father and his family in the joint businesses are given to him. What is to be seen is that a memorandum of understanding was arrived at between the parties on 1 November 1999 as per which different properties were apportioned between the two families. This memorandum of understanding is filed on the record of the case and appears at page 167 of the paper book. Para (5) deals with memorandum of understanding about allotment of shares held by (late) Shri Om Prakash in four main operating private limited companies and it was unanimously agreed that this should be allocated as per the Will of (late) Shri Om Prakash. It would be useful to reproduce this para:

"Para 5: It was unanimously decided that the shares of Lala Om Prakash Sarin in the four main operating private limited companies should be allocated to the following as per the percentages willed by Lala Om Prakash Sarin in his will.'"

14. Thereafter, in four sub-paras, four companies are mentioned as Lucky Star Estate (India) (P) Ltd., Niagara Motels and Builders (P) Ltd., Om Apartments (P) Ltd. and Parabal (P) Ltd. The shareholding which was held by (late) Shri Om Prakash is allocated to the respondent and his sisters on the basis of a Will. Three salient aspects which can be deduced from this memorandum of understanding would be as under:

(a) There was a settlement between the two families as per which assets were divided between the families.

(b) This settlement categorically refers to the Will executed by (late) Shri Om Prakash, which is acted upon as well. It is clear that the Will is not only accepted by LRs of (late) Shri Om Prakash but by other group, namely, B.K. Abbi as well.

(c) The name of the appellants' company is conspicuously absent in the entire memorandum of understanding.

15. It is, thus, clear that without any formalities of making application for transmission of shares, obviously treating different companies as venture of two families, the shares in the other companies were transmitted in favor of the respondent and other beneficiaries, namely, his sisters, as per the Will. It was expected that Shri B.K. Abbi and his family would do the same about the appellants' company as well. Presumably because of the reason that this company was not having any operations, which is the position even today, the company was not included. It could also be that the appellants did not want to give the respondent his due share in this company. For whatever reason, it was done, this act of omission and commission would naturally be attributed to the appellants in the facts of the case and bearing in mind that the respondent was only 16 years of age and other legal heirs of (late) Shri Om Prakash were respondent's married sisters and obviously not actively involved in any of the family business. Incidentally, this would also provide an answer to the contention of the appellants about the alleged delay in approaching the Company Law Board, although not a significant issue any longer as opined earlier.

16. In the aforesaid background, let us discuss the action of the Board of directors in deciding to issue rights share. All these directors are of one group as there is not any representation of respondent's family after the death of (late) Shri Om Prakash. In a non-functional and defunct company-they decided to issue rights share. up to now the shareholding is 40:60 per cent. They knew it fully well that shares of (late) Shri Om Prakash in this company are not transmitted in favor of the respondent or his sisters. They also knew it fully well that (late) Shri Om Prakash had died. Letter for rights share is written to (late) Sh. Om Prakash. Obviously, a dead person would not respond. Response came from his son who had, by now, not only attained majority but is a Chartered Accountant who understands the implications. He acted swiftly by making a request for issuance of rights share in the name of the executors and gave a cheque for this purpose. In the reply, the company does not take this objection that shares cannot be allotted to the executor. On the contrary, he is asked to comply with some formalities, namely, provide copy of the Will and no objection certificate from other legal heirs. Was it not a motivated move, when way back in the year 1991-the appellants had accepted the very same Will and had even transmitted the shareholding of (late) Shri Om Prakash in other companies in favor of the respondent and his sisters on the basis of the same Will? The clear impression one gets is that the stance of appellants was to deny the shareholding to the respondent and/or other legal heirs of (late) Shri Om Prakash and thus decided to allot the shares to appellant No. 2. In a non-functional company, obvious move to issue rights share and ultimately allot 19,000 shares to one of its own family members, was to disturb the shareholding equilibrium. With this move of the appellants 2 and 3, shareholding now virtually comes to 20:80. Why it is done? Obviously, as the company is not functioning, if it is to be wound up, the move is to get 80 per cent share in the assets by subscribing to these shares and paying only the face value of the shares.

17. It may be mentioned, as held by the Supreme Court in the case of World Wide Agencies (P) Ltd. and Anr. v. Mrs. Margarat T. Desor and Ors. (1990) 1 Comp LJ 208 (SC): AIR 1990 SC 737, that even legal representatives of deceased member can move a petition under Sections 397 and 398 of the Act. In this case, the Supreme Court discussed the effect of Section 41 as well as Article 28 of Table A Schedule I of the Companies (Court) Rules, 1959 and after taking note thereof held as under (para 18 at page 215 of Comp LJ):

It is true that it must be a member and Section 41 of the Act provides that a member of a company is a person who has applied in writing and 'whose name is entered in the register of members' is entitled to move the petition. It appears in this case that names of respondent Nos. 2 and 3 had not then been entered in the register of members at the relevant time when the application was made. But the name of late Shri S.K. Desor was still on the register of members and the requisite shareholding for moving a petition under Sections 397 and 398 of the Act was held by him. The question, though res integra so far as this country is concerned, has been considered in England, where Pennycuick, J. had occasion to consider this In re Jermyn Street Turkish Baths Ltd. (1970) 3 All ER 57. The company there was incorporated in 1946 and represented a joint venture by L and S. In 1952, S transferred his shareholding to Mrs. P who became a director of the company. L died in 1953 and thereafter, Mrs. P was mainly responsible for the company's affairs. The petitioners therein were appointed administrators in L's estate in 1960 and in 1961 at their request, the names of the petitioners therein were entered in the register of members of the company against the name L as administrators of L. On the questions whether the entry constituted merely a note of the grant of administration or the registration of the petitioners as members and whether the petitioners were members of the company for the purposes of presenting a petition under Section 210 of the English Companies Act at p. 65 of the report. Pennycuick, J. noted that it was contended before him that the petitioners therein were not members of the company, and hence had no locus standi to present the petition bearing in mind that petition under Section 210 of the English Companies Act could only be presented by a member of the company. In the facts of that case, Pennycuick, J. held that the petitioners were duly registered as members of the company but he proceeded to hold that even if it were so, the personal representatives of a deceased family must be regarded as members of the company for the purposes of Section 210 of the English Companies Act. In this connection, reference was made to the decision of Buckley, J. in Re Bayswater Trading Co. Ltd. (1970) 1 All ER 608 (Ch D), where at p. 609 of the report, it was held that 'member' would include representative of a deceased member for the purpose of Section 353 of the English Companies Act. This judgment of Pennycuick, J., went up in appeal to the Court of Appeal and it was reversed: see Re Jermyn Street Turkish Baths Ltd. (1971) 3 All ER 184. But on the point whether the representative of a deceased member can maintain an action under Section 210 of the English Companies Act, the views of Pennycuick, J., were not reversed or modified. Mr. Nariman submitted that the observations of Pennycuick, J., were obiter for the decision of the case. We are unable to agree. Indeed, this was a point specifically referred to by Pennycuick, J., as being raised and specifically decided. But we need not detain ourselves with this controversy, because the decisions of the English Courts are not binding in the courts of India. But the observations or the reasoning are of persuasive value. We are clearly of the opinion that having regard to the scheme and the purpose of Sections 397 and 398 of the Act, the reasoning on a pari materia provision of the English Act would be a valuable guide. The said construction appears to us, to further the purpose intended to be fulfillled by petitions under Sections 397 and 398 of the Act. It facilitates solution of problems in case of oppression of the minorities when the member is dead and his heirs or legal representatives are yet to be substituted. This is an equitable and just construction. This construction, as suggested by Pennycuick, J., does not militate against either equity or justice of such situation. We would, therefore, adhere to that construction. In this connection, it may be mentioned that in the 1972 Edition of Gore-Browne on Companies, it has been stated as follows:

'It has recently been settled that the personal representatives of a deceased member, even though they are not registered as members; are entitled to present a petition under Section 210. In re Jermyn Street Turkish Baths Ltd. (1970) 3 All ER 57, Pennycuick, J., held that on its true construction, Section 210 required that the word 'member' should include the personal representatives of a deceased member, on whom title of his shares devolved by operation of law'."

18. I, therefore, do not find any infirmity in the impugned order passed by the Company Law Board. This appeal being devoid of any merit, is hereby dismissed with cost quantified at Rs. 10,000.