Can allotment of shares be demanded after a long delay?

Below is the extract of the judgment of the Company Law Board, Delhi which has come in rescue of the persons who have invested in the Company thinking that they would be allotted proportionate shares. It is a very good example emphasizing the need of gaining the knowledge of company law or the corporate regulations before investing into the company or jointing hands with somebody in getting a company incorporated. In the case referred to below, it is fortunate that the Company Law Board has come to their rescue asking the Respondents to allot shares to the Petitioners who are denied of their rightful shareholding in the Company though they have invested substantial money when the company was initially incorporated.

The Judgment extracted below would be very useful to understand the things practically and it is very useful for the people who have invested huge amounts in the Company thinking that they will get their rightful share and rights in the Company.

I personally believe that the judgment extracted below is one of the finest judgments under section 397/398 of the Companies Act, 1956 and also it will throw a light into the practical corporate actions and the complications in the Course.

Extract of Judgment:

BEFORE THE COMPANY LAW BOARD

PRINCIPAL BENCH

NEW DELHI

C.P. No.47/96

Present: 1. Shri S. Balasubramanian, Vice Chairman

2. Shri C.R. Mehta, Member

In the matter of Companies Act, 1956- Sections 397/398

AND

In the matter of Shri Harin Narain Sharma&others

Versus

M/S Bagpat Engineering Company Limited (Now known as

Bagpat Industries Limited)&others

PETITIONERS:

1. Shri Har Narain Sharma

2. Shri Ram Dutta Sharma

3. Shri Om Dutta Sharma

4. Shri Jitendra Sharma

5. Bijendra Sharma

6. Shri Sanjay

7. Shri Jagpal Sharma

8. Smt. Kiran Sharma

9. Smt. Saroj Sharma

10. Smt. Sunita Sharma

11. Ms. Vijaylakshmi

12. Shri Vikas Sharma

13. Shri Promod Sharma

14. Shri Zile Singh

RESPONDENTS

1. Bagpat Engineering Company Limited

2. Shri K.A. Sharma

3. Smt. Kusum Lata Sharma

4. Shri Vijay Sharma

5. Shri Vinay Sharma

6. Shri Arun Sharma

7. Shri Ram Kishan Sharma

8. Shri Shiv Charan Sharma

9. Shri Chhote Lal Sharma

10. Shri Ajay Sharma

11. Shri Rajiv Sharma

12. Smt. Saroj Sharma

13. Smt. Indira Sharma

14. Shri Anuj Sharma

15. Shri Anil Sharma

16. Registrar of Companies, New Delhi

17. State Bank of India, Bagpat, Distt. Meerut

18. Industrial Development Bank of India, New Delhi

Present on behalf of parties:

1. Shri V.N. Koura, Advocate .. for petitioners

2. Ms. Mona Aneja, Advocate .. for petitioners

3. Shri V.P. Arya, Advocate .. for respondents

4. Shri Sanjeev Ralli, Advocate .. for respondents

5. Ms. Veena Ralli, Advocate .. for respondents

6. Shri Atul Sharma, Advocate .. for UPFC

O R D E R

(Date of final hearing: 9.2.2001)

S. BALASUBRAMANIAN:

1. This petition alleging acts of oppression and mismanagement in the affairs of M/S Bagpat Engineering Company Limited ( the company) in terms of Sections 397/398 of the Companies Act, 1956 ( the Act) was filed on 20.8.1996. This company was incorporated as a private limited company in March, 1987 with 26 shareholders. In August, 1994, its name was changed to Bagpat Industries Private Limited and it was converted into a public company in the name of M/S Bagpat Industries Limited in October, 1994.

2. A brief of the petition is as follows: The petitioners and the respondents are closely related family members. The petitioners are illiterate living in a small village. The 2^nd respondent who is closely related to the petitioners and who had gained some experience in paper technology while working in Germany, induced the petitioners to invest huge sums of money in the proposed company giving rosy promises. At the time when the company was formed as a private limited company, the petitioners' group had invested a sum of Rs.13,34,000 of which shares were allotted for Rs. 5,61,000 and a sum of Rs. 3,61,518 was kept as share application money, the balance was spent by the petitioners' group for the benefit of the company. However, the respondents had shown the share application money as interest free loan with a view to deny the petitioners their rightful entitlement for further shares. The shares held by the petitioners' group accounted to 43.7% shares in the company. The 1^st petitioner was the Chairman of the company right from its incorporation. Since the 2^nd respondent and his family members did not have any funds to contribute towards share capital, the 1^st petitioner accommodated them by permitting the 2^nd respondent to withdraw money from the company's account and invest the same in the share capital of the company. Therefore, for all practical purposes, the petitioners' group was in majority. The entire initial expenditure on the company towards purchase of land, building, machinery etc. was met out of the funds invested by the petitioners. The 1^st petitioner had also mortgaged his properties for availing loans for the company. There was an agreement between the 1^st petitioner and the 2^nd respondent that the former would continue as the Chairman of the company and the later as the Managing Director of the company and that the profits of the company would be divided equally among the shareholders in the proportion of the amount invested by both the groups with 24% interest on the loans. Some disputes arose between the parties and on intervention of one late Shri Ram Kumar Sharma, Principal of a College, it was decided that all the directors would hand over him the resignation letters and accordingly, the 1^st petitioner also did so. Before the disputes could be sorted out, Shri Ram Kumar Sharma expired and the 2^nd respondent somehow obtained the resignation letter of the 1^st petitioner from the wife of late Shri Ram Kumar Sharma and got it accepted by the Board of Directors of the company. Thus, the first act of oppression against the petitioners was committed by throwing out the main promoter of the company from the affairs of the company. The 2^nd respondent, even though is coming from a family without any means, has amassed wealth by diverting the funds of the company for his personal use. He has also diverted a large amount of money for another company, namely, Bagpat Industries Limited in Gujarat in collusion with IDBI which has funded that company. The petitioners were not given notices for any meetings and had been kept completely in dark about the affairs of the company. The 2^nd respondent has been treating the company as of his own and has been indulging in various acts contrary to the provisions of the Act. Aggrieved by the conduct of the 2^nd respondent, the petitioners filed a winding up petition under Section 433 (f) of the Act in the High Court of Allahabad which was dismissed for want of jurisdiction. From the reply field by the respondents in those proceedings, it came to light that the share capital of the company had been increased from Rs. 12,81,000 to Rs. 21,81,000 by allotment of further shares to their own group in exclusion of the petitioners' group. Thus with the further issue of shares, the percentage holding of the petitioners had come down to 22.6%. It also transpired that the resignation of the 1^st petitioner had been accepted in a Board Meeting held on 4^th September, 1992 and that 8^th respondent was appointed as the Chairman of the company. During the pendency of those proceedings, the petitioners received a letter dated 4.1.1995 from the company ( Annexure-A) wherein the petitioners were informed that the company had been converted from a private limited company into a public limited company. Along with that letter, the company had also enclosed a cheque refunding the amount of loans given by the petitioners to the company on the ground that a public company cannot accept deposits from shareholders. The petitioners never received any notice for the general body meeting in which the decision to convert the company was taken. The petitioners had requested the Registrar of Companies not to take on record the resignation letter of the 1^st petitioner and also advised the company’s bank not to allow any transaction without the signature of the 1^st petitioner being the Chairman of the company. Yet, these authorities did not take any action on the request of the 1^st petitioner. With these allegations, the petitioners have sought for various reliefs.

3. In the reply filed by the respondents 1,and others, all the allegations have been denied. According to them, at the time of filing of the petition, the share capital of the company had gone up to about Rs.2.04 crores and as such the petition itself is not maintainable in terms of Section 399 of the Act since the shareholding of the petitioners would be only about 2.7%. They have also raised various other technical objections inter alia that in the first paragraph of the petition itself, the petitioners have sought for winding up of the company, which is beyond the scope of Sections 397/398 of the Act and that the petition does not comply with various provisions of the Company Law Board Regulations and that knowingly that the name of the company had already been changed, the petitioners have filed the petition in respect of M/S Bagpat Engineering Company Limited, which is no longer in the Register of Companies. They have sought for dismissal of the petition.

4. Shri Kaura, Advocate for the petitioners submitted as follows: The petitioners were the major contributors of funds for the company at the time of its initial stages. They invested money in the company in 1986 and 1990. Their contribution was much more than of the respondents. However, instead of allotting shares for all the money of Rs. 13.4 lacs invested by the petitioners, they were allotted shares only for Rs. 5.61 lacs. However, the respondents got shares without paying any money. Even then, the petitioners held 44% shares in the company. The 1^st petitioner was the Chairman of the company from 1986 onwards till he was removed by accepting the alleged resignation letter. By issuing further shares, the percentage holding of the petitioners was reduced from 44 to 22.6% and again to 2.2%. The status of the company was also changed from a private limited company into a public limited company without the knowledge and consent of one of the promoters' group which had contributed substantially at the initial stages. Referring to pages 70 and 71 of the petition, he pointed out that under the head " Unsecured Loans" as on 31.3.1990, Rs 3.61 given by the petitioners has been shown as share application money. Therefore, the company should have allotted shares in respect of the application money. Instead, all these amounts were returned to the petitioners in 1995 after the company was converted into a public limited company, that too without any interest. The petitioners did not give unsecured loans out of love and affection but with a view to get shares allotted as being the promoters of the company they desired to have continued association with the company. Having induced the petitioners who were illiterate to invest in the company, the respondents have completely ignored the petitioners once the company started looking up. As a matter of fact, the respondents cannot show the source of funds for their investment in the company. Only when the amicable settlement of the dispute between the parties failed in 1991-92, the 2^nd respondent resorted to various illegal means to grab the company exclusively for his own group. This, he did by allotment of further shares to his own group in exclusion of the petitioners. From that time onwards, no notices for annual general meeting was sent to the petitioners in spite of the fact that they had deposited a sum of Rs.500/- with the company for sending all communications by registered post (Pages308-312 Vol. 4). This letter was sent on 4.2.1992. In spite of this, without notice to the 1^st petitioner, the Board of Directors held a meeting on 27.8.1992 and accepted the forged resignation letter of the 1^st petitioner. Thereafter, in 1994, the petitioners filed a winding up petition in Allahabad High Court. Only from the reply filed by the company in those proceedings, the petitioners came to know that in the year 1994, the share capital had been increased from Rs.12.81 lacs to Rs.24.81 lacs and that these additional shares had been allotted to 35 shareholders. By this allotment, the petitioners were reduced from 40% to 22.6%. The petitioners were not offered any shares even though they were promoters of the company. Even for the allotment of shares, no consideration was actually received by the company and the very purpose of the allotment was to reduce the petitioner to an insignificant minority. This allotment would also indicate that in breach of the fiduciary duties the 2^nd respondent has benefited himself and his group at the cost of the petitioners' group. In all fairness, the company should have allotted shares to the petitioners against the share application money deposited with the company before allotting to the relatives of the 2^nd respondent. Since no consideration was received in respect of these shares, the company itself was not benefited in any way.

5. The learned counsel further submitted as follows: The change in the status of the company is also illegal. When the company changed its status, the Articles should also have been amended to delete the restrictive provisions applicable to a private limited company. For the purposes of altering the Articles, special resolution is necessary which could not have been possible without the approval of the petitioners. Therefore, to ensure that the petitioners did not participate in the general body meetings, no notice was given to the petitioners for the alleged general body meeting on 19.9.1994. After the change in the status of the company, the respondents are alleged to have passed a resolution in terms of Section 81 (1A) of the Act with a view to deny proportionate allotment of further shares to the petitioners. After this, the respondents have increased the share capital of the company periodically without offering any shares to the petitioners. This has resulted the petitioner's percentage holding reduced to less than 3%. The change of status of the company and further issue of shares to the tune of over Rs.2 crores was masterminded by the 2^nd respondent only with a view to completely oust the petitioners from the affairs of the company and as such is a grave action of oppression.

6. The learned counsel further argued that when further shares were allotted, nearly 11.8 lakh shares for about Rs. 1.18 crores were allotted to 17 companies. Most of the companies are fake companies. According to him, most of the companies belong to either the 2^nd respondent/ his family members or the 8^th and 9^th respondents or their family members. These companies do not have any means to invest the huge amount towards the shares in the respondent company. Therefore, the only presumption is that money had been rotated for investment in these companies or these companies were used as conduit to invest in the shares out of the money siphoned of from the respondent company. He also pointed out that some of the companies are non existent companies. The directors of some of the companies are fictitious persons as is evident from the fact that the alleged directors are not available in their registered addresses as the letters sent to them had been returned undelivered. He also pointed out that in addition to the allotment of shares to the fake companies, the 2^nd respondent and their family members have acquired shares for over Rs.48 lacs besides investing over Rs. 61 lacs in other companies. They have not disclosed the source from which these investments were made. He contended that it should have been only through the money siphoned of from the company. He also pointed out that in the same way, the 8^th and 9^th respondents and their family members have also acquired shares worth over Rs.98 lacs from the company during 1994 to 1996. They have also not disclosed the source of funds for investment. Therefore, either no funds had been received by the company in respect of the shares allotted to these persons and fake shares had been issued or the money siphoned of from the company should have been invested by these persons. Therefore, he urged that an investigator should be appointed to investigate into this matter.

7. Summing up his arguments, he pointed out that the directors are bound by their fiduciary duties to allot shares only for the benefit of the company and allotment of shares to increase their own voting rights is a breach of the fiduciary duties and as such an act of oppression. On this proposition, he relied on Piercy Vs. S. Mills & Co. ( 1918-19 AER 313 ), R.N. Jalan Vs. Deccan Private Limited ( 75 CC 417 AP ), V. Radhakrishan Vs. P.R. Ramakrishnan ( 78 CC 694 Mad ), Maleshwara Finance & Investment Co.Pvt.Ltd. Vs. CLB ( 81 CC 66 ), Akbar Ali A. Kalbart Vs. Konkan Chemicals Pvt. Ltd. ( 1994 (3) CLJ 102 CLB ). He also pointed out that the directors are in a position of trustees and therefore, their actions should be to protect the interest of all the beneficiaries. In regard to the objection of the respondents that the name of the company has been wrongly noted, he pointed out such a mistake cannot be fatal to the petition as the petitioners have mentioned only the old name of the company. For the proposition that wrong or incomplete mentioning of a defendant cannot be fatal he relied on Whittam Vs Daniel &Co Ltd ( 32 CC 69). He further submitted that in spite of direction of the Bench to substantiate the sources of investments made by the 17 companies and other respondents in the share capital of the company, no details have been furnished and such inference should be drawn against them as held by various Courts in terms of Section 106 and Explanation (g) to Section 114 of the Evidence Act and cited a number of cases. He also pointed out the company has not produced any evidence to show that notices for various meetings were sent to the petitioners and the very fact that the petitioners have averred through an affidavit that they have not received any notice, it is for the respondents to prove that the company had sent notices. On this also, he cited a few cases. Drawing our attention to Barium Chemicals Ltd Vs CLB( Air 1967 SC 295) and In Re Incab Industries Ltd (1997 1 CLJ 156-CLB) he argued that when serious allegations of fraudulent conduct by the management have been made, it is necessary to get the same investigated so that the investigator having powers not only to investigate the affairs of the company but also associated companies, could bring out the truth. He prayed that the following reliefs should be granted to the petitioners: Direct cancellation of all the shares allotted and issued beyond the original capital of Rs. 12,81,000, restore the status of the company as a private limited company, direct the respondents to restore to the company all the money siphoned of by the respondents and order an investigation into the affairs of the company.

8. Shri Arya and Shri Sanjeev Ralli, Advocates appearing for the respondents submitted as follows: The petitioners have, with the malafide intention, mentioned the wrong name of the company knowing well that the name of the company had been changed. It is obvious from the fact, that by alleging that the company had diverted the funds to another company by name M/s Bagpat Industries Ltd, Gujarat, they have tried to strengthen their case against the respondents. It is not an accidental but malicious wrong mentioning of the company and as such on this score alone the petition deserves to be dismissed. The petitioners have also not complied with the various provisions of the CLB Regulations. Further, at the time when this petition was filed, there was already a pending winding up petition before the Delhi High Court about which the petitioners have not made any disclosure in the petition. It has been held in PS Nanawati Vs. Jaipur Metal ( 1995 5 CLJ 505 ) that if a person has already availed an alternate remedy, then the extraordinary jurisdiction under Sections 397/398 should not be invoked. Further, the petitioners holding less than 3% shares in the company at the time of filing the petition had no locus standi in terms of Section 399 of the Act to file this petition and as such the petition deserves to be dismissed as not maintainable.

9. On merits of the case, the learned counsel submitted as follows: It is a fact that the petitioners and the respondents joined together to incorporate this company and the 1^st petitioner was appointed as the Chairman of the company. However, it is wrong to contend that the petitioners had invested Rs.13.5 lacs. Actually, they had invested Rs.5.61 lacs as share capital and they have given unsecured loans of Rs.3.61 lacs. The claim that the balance was spent by the petitioners for the benefit of the company is not borne out by any records of the company. Their claim on the basis of the bank account showing withdrawal of cash which was spent for the benefit of the company cannot also be sustained in as much as both their accounts as well as the accounts of the company were maintained in the same bank and they could have transferred the said amount into the bank account of the company. Further, the 1^st petitioner being the Chairman of the company during the relevant time, could have incorporated the cash payment in the books of accounts of the company. Therefore, there is nothing n record to show that the petitioners had incurred cash expenses for the benefit of the company. Further, the amount of unsecured loan was always treated as such and was never taken into the share application account of the company. In view of the understanding that this amount would be refunded without interest, the same was refunded to the petitioners after the company became a public company. In other words, presently the investment of the petitioners is only Rs.5.61 lacs. in the form of share capital. As far as cessation of office of the 1^st petitioner as the Chairman is concerned, the fact is that there were disputes within the family of the 1^st petitioner and the company was not concerned with the dispute. As per the mediation done by late Shri R.K. Sharma, the 1^st petitioner was to hand over all the shares held by his group to the 8^th and 9^th respondents and were to resign from the Board in exchange of the investment of these respondents in the brick klin and Shiv Shakti Gram Udyog. Accordingly, these respondents gave up his investments in favour of the 1sr petitioner and the 1^st petitioner tendered his resignation letter dated 27.8.92. However, he did not transfer his shares held by his group in the company. This fact could be seen from Annexure in Page 283 of Vol.2 filed by the petitioners themselves. On account of this family settlement only, the petitioner himself wrote to the State Bank of India on 24.8.1992 ( Annexure R-1 Vol.2) seeking for cancellation of his name as a guarantor. The company also took up this matter with the Bank and renegotiated the limits without the 1^st petitioner being a guarantor. Later his resignation was accepted in a Board Meeting held on 4.9.1992. This fact was also communicated to the petitioner by a registered letter dated 7.9.1992 which was returned as refused ( The original letter dated 7.9.1992 was produced in a sealed cover for our perusal ). At this point of time, Shri R.K. Sharma was alive and therefore to contend that after is death the resignation letter was obtained from the wife is wrong. Further, while admitting that he had signed the resignation letter, in various averments in the pleadings, the 1^st petitioner has claimed that the said letter was forged which is also incorrect. In other words, the 1^st petitioner voluntarily resigned from the Board which was accepted by the Board of Directors. Even otherwise in a 397/398 petition, one can agitate only his rights as a shareholder and not in any other capacity.

10. In regard to allotment of further shares, the learned counsel submitted as follows: Originally, the authorized capital of the company was Rs.15 lacs. It was increased to Rs.25 lacs in March, 1993 and again to Rs.75 lacs in May, 1994 at the requirement of the bank that the promoters should bring in necessary funds for working capital. The respondents' group brought in about Rs.50 lacs during this period towards share capital. Notices for all the general body meeting sin which the decision to increase the authorized capital were sent to the petitioners' group. Since the petitioners were to transfer their entire holding to the respondents 8 and 9 as per the settlement of late R.K.Sharma, they were not offered any shares. Further, since the 1^st petitioner had acted prejudicially against the interest of the company by sending various letters to the financial institutions and Governmental authorities complaining about the affairs of the company, the company decided not to offer any further shares to the petitioners. After the company became a public company, requisite resolution under Section 81 (1A) of the Act was passed. Thereafter, the increase in capital was necessitated due to the company setting up the new unit in Gujarat. In other words, the issue of further shares was made only for the benefit of the company as would be evident from the fact that there has been increase in the fixed assets by over Rs.160 lacs between 1993-94 and 1995-96 and the turnover has gone up from Rs.97 lacs in 1992-93 to Rs.380 lacs in 1995-96. Even though the company was incurring losses during the year 1988-89 and 1989-90, yet, it started earning profits thereafter. Even otherwise, the petitioners were never in majority in the company and therefore the question of reducing them into minority by issue of further shares does not arise.

11. In regard to the allegation relating to siphoning of the funds of the company or that shares had been issued without receipt of cash, the learned counsel submitted as follows: The company has been increasing the share capital in stages depending on requirement of funds for capital requirements of the new unit as also for working capital needs. As would be evident from pages 193 to 205 of Vol.4, practically the entire consideration for the shares issued by the company had been received either by cheques or by pay order from the shareholders Therefore, the question of allotment of shares without receipt of cash does not arise. Without receipt of cash, the company could not have increased its fixed assets by nearly Rs.150 lacs. In addition, the company could not have increased its turn over by more than 3 times. In addition, the company has also paid substantial interest and financial charges to the financial institutions excluding making a contribution to the exchequer of over Rs 2.25 crores. Therefore, to say that the company has allotted shares without receipt of consideration is absolutely baseless.

12. In regard to financial resources of the 17 companies, which had invested in the shares of this company as also that of the other respondents who have acquired shares in the company, the learned counsel submitted that all these companies and the respondents are regular income tax assesses and their audited balance sheet are already available on record. Therefore, they contended that the allegation of the petitioners that they are fake companies or that they had no resources to invest in the company is not borne by facts.

13. Summing up his arguments, the learned counsel contended that the petitioners have not established any act of oppression and mismanagement in the affairs of the company so as to either seek any relief as made in the petition or to the relief of seeking an investigation into the affairs of the company. According to them, neither the provisions of Section 397 nor that of Section 398 of the Act are attracted in facts of this case. Since one of the requirements of Section 397 is that there should be an averment that the facts and circumstances exist justifying winding up of the company on just and equitable grounds but such winding up could be prejudicial to the petitioners, the absence of such averment in the petition take the purview of Section 397 away from the petition. On this proposition, he relied on Hind Overseas Pvt.Ltd. Vs. Jhunjhunwala ( 46 CC 91 SC ). Even otherwise, since none of the allegations merit winding up of the company on just and equitable grounds, no relief could be granted as decided in Kiran Sandhu Vs. Saraya Sagar Mills ( 1996 2 CLJ 128 ). He also pointed out that in the petition, there is no grievance that the petitioners have been oppressed other than alleging that there have been misappropriation of funds or lack of confidence in the management. Since one of the main allegation relates to issue of further shares which is actually a bona fide and interest of the company, the same cannot constitute oppression as held by the Supreme Court in Needles Industries case as also in other cases cited before the Bench. Further, on the ground of removal of the 1^st petitioner as a director, the company cannot be wound up as held by Shekhar Mehra Vs. Kilpest Private Ltd. ( 1986 3 CLJ 283 ). Accordingly, he submitted that the Section 397 of the Act is not applicable in the facts of this case.

14. As far as the application of Section 398 of the Act is concerned, the learned counsel contended that this Section deals with prejudice to public interest or the interest of the company. In so far as the interest of the company is concerned, the respondents have established that the company has not only put up a new unit but has also started earning substantial profits over the years and therefore the question of the respondents having acted against the interest of the company does not arise. Even their allegation that there has been siphoning of funds or issue of shares without receipt of consideration have not been established. As held by this Bench in B.S.Choudhary Vs. Indira Singh ( 1998 28 CLA 54 ), allegations of financial irregularity which are not substantiated cannot be a ground for relief against mismanagement or ordering of an investigation. In so far as prejudice to public interest is concerned, he pointed out that there is no averment in the petition on this issue and as a matter of fact because of the good performance of the company, it has contributed to the exchequer over a sum of Rs.2.26 crores during 1991 to 1995-96. Therefore, nothing has been shown or established that the affairs of the company are being conducted in a manner prejudicial to the public interest.

15. We have considered the pleadings and arguments of the counsel. In view of the close relationship between the parties, we attempted at settling the disputes amicably by which the respondents could adequately compensate the petitioners in regard to their investment in the company so that the petitioners could walk out of the company. Even though, both the sides showed their willingness for an amicable settlement which was discussed in a few hearings before us, yet, the quantum of compensation could not be agreed upon by the parties and as such the efforts failed. During the proceedings, a number of applications were filed by both the sides including an amendment to the petition by the petitioners. Those who became shareholders of the company in addition to the original 26 shareholders were also impleaded as parties. Both the sides have filed written submissions which have also been taken into consideration in this order.

16. Firs we shall deal with the various objections raised by the respondents in relation to the maintainability of the petition. As far as the technical objections raised by the petitioners in regard to non compliance with the CLB Regulations are concerned, we do not consider that such technicalities could be fatal to the petition as the Regulations only lay down the procedures. In regard to the objection relating to non maintainability of the petition in terms of Section 399 of the Act, this Board had taken a view in number of cases that if the petition contains allegations of further issue of shares but for which the petition would be maintainable under Section 399, then, the petition could be considered first in relation to further issue of shares and if the allegations are justified, then, the merit could be gone through. Reference may be made to the decisions of this Board in TNK Govindaraju Chetty V Kadri Mills Ltd. ( 1998 30 CLA 49); Om Prakash Gupta Vs. Hicks Thermometer (India )Ltd. ( 1999 33 CLA 461 ) and Dipak G Mehta Vs. Shree Anupar Chemicals (India)Pvt.Ltd. ( 98 CC 575 ). Therefore, before getting into the merits of the case, we shall be first examining issue relating to further issues of shares to find out whether the petitioners have established the same to an act of oppression.

17. Before considering the allotment of shares, it is necessary to find out the amount of investments made by the petitioners in the company. Petitioners claim that they had invested about Rs.13.5 lacs in the company while according to the respondents they had invested Rs.5.61 lacs in shares and Rs 3.61 lakhs as unsecured loans. This leaves a balance amount of about Rs 4.28 lakhs, which according to the petitioners was withdrawn by them from their own accounts in the bank and utilized for company purposes. They have produced copies of their bank statements to evidence withdrawal of the said amount on various dates. During the period when they had reportedly spent the money for the company purposes, the 1^st petitioner was the Chairman of the company and he could have got these payments entered into the books of the company. According to the respondents, there are no such entries and as a matter of fact at the request of the learned counsel for the petitioners, we had directed the company in our order dated 2.4.1997 to furnish the petitioners with full details of the unsecured loans as exhibited in the balance sheet for the year 1987-88 to 1990-91. Therefore, even assuming that the petitioners' group had spent Rs.4.28 lakhs by cash for the benefit of the company, in the absence of any entries in the books of accounts of the company, we are not able to hold that the petitioners had spent this amount for the benefit of the company.

18. The main grievance of the petitioner is that by allotment of further shares exclusively to the respondents' group, the petitioners' group has been reduced to a minority. However, in the petition itself, they have averred that they held 43.7% shares in the company. Therefore, we do not find substance in their claim that they were in majority. Therefore, allotment of further shares has not converted the majority in minority or vice versa. However, it is not that only when such a conversion takes place that the act of further issue of shares could be considered to be oppressive. When one of the two promoters groups is denied of further shares by which its present percentage holding is reduced, then the issue of further shares could be considered to be oppressive. Even though the respondents have contended that due to the prejudicial acts of the 1^st petitioner, no further shares were offered to that group, we are of the view that even assuming that the 1^st petitioner could have been denied of further shares, there is no justification in denying the other shareholders in his group from allotment of further shares. While we are fully convinced from the facts placed before us, both through the pleadings as well as during the arguments, that the motive of the company in issuing further shares was purely for the benefit of the company as evidenced by increase in the fixed assets, turnover, profitability etc, yet, in facts of this case, we are of the view that the company should have offered shares to the petitioners group. Further, the petitioners have also complained about non allotment of shares against the share application money treated as unsecured loans by the company. We find some justification in the complaint of the petitioners in this regard. It is on record that as is seen from page 70-71 of the petition that under the heading " Unsecured Loans from Directors/Shareholders as on 31.3.1990", all the amounts remitted by them have been shown as " Amount received for share application money". According to the respondents, the promoters had to bring in unsecured loans in view of the situation by the bank and as such interest free loans were taken from the promoters. They have also pointed out during the Chairmanship of the 1^st petitioner, he never demanded shares against the unsecured loans. It is to be noted that the amount standing in the name of the petitioners as unsecured loans even assuming that the same was not kept as share application money, was returned to the petitioners in January, 1995 during the same time when the company was increasing its paid up capital by allotment of shares to the respondents' group. In all fairness, the company should have asked the petitioners whether they are willing to convert this amount into share capital, which the company did not do. Therefore, we find substance in the grievance of the petitioners that they should have been allotted shares against the share application money/unsecured loans. Further, we also note that by the time when the money was refunded to the petitioners, further shares in the company had been issued and that petitioners' percentage shareholding had come down and the 1^st petitioner had ceased to be a director. In other words, the association of the petitioners' group as one of the promoters had been marginalized. In that case, their keeping their money as unsecured loans without any interest also did not arise. The best the company could have done is to refund the amount with appropriate rate of interest. The contention of the respondents that the loans given by them also were refunded without interest is not a justification for non payment of interest to the petitioners, since the respondents continue to be in the management of the company, while the petitioners are not. Thus, but for non allotment of shares against the share application money when the company was actually allotting shares and also for further allotment of shares periodically in exclusion of the petitioners group, their percentage holding would not have come down and they could have maintained this petition. Therefore, since, we have come to the conclusion that non allotment of shares to the petitioners is an act of oppression, this petition is maintainable, not withstanding their present shareholding below the one stipulated in Section 399 of the Act.

19. In regard to the complaint of the 1^st petitioner regarding his resignation, the respondents have argued that in a petition under Sections 397/398, directorial complaints cannot be entertained. While in the normal course, the contention of the respondents is correct, yet, in family companies wherein participation in the management has been in vogue for length of time, then ousting one of the family members from the management of the company could be an act of oppression. This is what has been held in a number of cases by this Board. Therefore, whether directorial complaints could be entertained or not would depend on facts of each case. In the present case, admittedly, the 1^st petitioner was one of the promoters of the company and was also the Chairman of the company right from 1987. Therefore, his complaint that he has been ousted from the company illegally requires consideration. However, we find that his stand on the issue does not seem to be consistent. While in the petition, he has admitted to have signed a letter of resignation, he later complained that the said letter was undated and was procured from the wife of late Shri R.K.Sharma. In the later pleadings, he has complained that the said letter was a forged letter. According to him, he came to know of the acceptance of his resignation on 4.9.92, only from the reply filed by the respondents in the winding up proceedings before Allahabad High Court. The winding up petition was filed in January, 1994. In that petition, in paragraph 6 it had been stated “But later on respondents violative of oral agreement and understanding and rules and regulations applicable to the Company's affairs, changed the status of the petitioner no.1 Shri Har Naraian Sharma so as to grab the company for the personal benefit of the respondents to the exclusion of the petitioner”. This averment would indicate that the 1^st petitioner had the knowledge that his status as a director/chairman of the company had been changed even at a time when he filed the winding up petition. He did not challenge the same. Further, if the 1^st petitioner had continued to be the Chairman as claimed by him, there is nothing on record to show that he either tried to assert his position as the Chairman or exercised any of the powers of the Chairman after 4.9.1992. It is also on record that after this date, the 1^st petitioner also wrote to the bank seeking to cancel his guarantorship in favour of the company. Therefore we are of the view that the allegation of the petitioner that he had been removed from the directorship on a forged resignation letter has not been established and that he has brought about the cessation on his own volition.

20. Another allegation of the petitioners is that the 17 companies and the other shareholders did not have sufficient financial strength to invest in the company and accordingly their apprehension is that either the funds of the company was rotated for issue of shares or money had been siphoned of from the company and routed through the 17 companies and other shareholders for investment in shares. We have perused the details given by the respondents in regard to the cash inflow and outflow during the relevant period as annexed at Page 205 of Vol. 4. From 1991-92 to 1993-94, the increase in share capital was to the tune of Rs. 12 lacs. Thereafter further increase was Rs.45 lacs in 1994-95, Rs.86 lacs in 1995-96 and Rs.135 lacs in 1996-97. During these 3 years, the increase in the fixed assets was to the extent of Rs.30 lacs, Rs.129 lacs and Rs.25 lacs approximately. In addition, the capital work in progress was Rs.28 lacs in 1995-96 and Rs.139 lacs in 1996-97. Further, during this period, there was an outflow of over Rs.2.5 crores for payment to exchequer sin the form of duties/taxes. Thus, but for receipt of money for the shares, the company would not have been in a position to invest in the fixed assets. The same acts would also rule out the possibility of taking away money from the company with the view to route the same through the shareholders for acquisition of further shares. However, during the last date of the hearing, we suggested to the respondents to file bank statements of the company during the relevant years to find out whether there was any substantial cash withdrawal and after the conclusion of the hearing, they filed copies of the bank statements, from which we find that there had been no large cash withdrawal which could have been routed through the other entities for acquiring shares in the company. The petitioners filed written submissions after filing of the bank statements by the company and they have also not pointed out any heavy cash withdrawal. Therefore, there is no basis for us to even to form a prima facie opinion that money could have been taken out of the company for acquiring the shares or that no money had come to the company as consideration for the shares.

21. In regard to the allegation of the petitioners regarding the financial capacity of the 17 companies and other shareholders, we are of the view that even looking into this aspect is beyond the purview of Sections 397/398 of the Act especially when we have found that there is no substance in the allegation of routing of the alleged siphoned of money from the company through these companies and other shareholders. Further, the respondents have filed the Income Tax Returns or the IT Assessment Orders in respect of most of the companies and the shareholders which indicate the investment made by them in the shares of the company. In that case, the Income Tax Authorities would have definitely looked into the source of funds of these companies/shareholders for investment in the shares. Therefore, we reject the prayer of the petitioners for an investigation into the affairs of the company.

22. The petitioners have also sought a direction for conversion of the company into a private limited company on the ground that the petitioners had not received notice for the general body meeting in which the decision on conversion into a public company was taken. They have not indicated as to how the conversion has prejudicially affected them or that it is an oppression against them. In view this and considering the fact that there are over 60 shareholders in the company, we reject this prayer.

23. Having held that the cessation of office of director was brought about by the petitioner himself on his own volition and that the allegations relating to siphoning of funds of the company for acquisition of shares has not been established and that it is beyond the scope of Sections 397/398 of the Act to look into the sources of funds of the shareholders to invest in the company, we have also held that non allotment of proportionate shares to the petitioners in facts of the case is an act of oppression. Accordingly, even though we have given the liberty to the petitioners to apply for shares up to 43.7%, being aware that it would involve a huge amount of money because of which the petitioners may not be in a position to acquire these shares, we also give the option to the petitioners to sell their shares to the respondents. It is on record that the petitioners group being one of the promoters had contributed to the seed capital of the company, the use of which has made the company to reach the present position having a high turnover, profitability etc, the fruits of which would be exclusively with the respondents who now hold nearly 97% of the share capital, while the petitioners have got nothing from the company inspite of being promoters of the company. Since their admitted investment is Rs 5.61d lakhs in the share capital and Rs 3.61 lakhs by of loans, we consider that it would be equitable that they should get appropriate returns on their investments. Therefore, in case the petitioners exercise the option to sell their shares, then the respondents shall be bound to purchase the same. The price of the shares will be computed by adding 20% simple interest from the date of investment till the date of purchase. In the same way, the company will also pay to the petitioners simple interest at the rate of 20% on the unsecured loans given by them but which has been refunded without interest, from the date of investment till the date of payment. In case the company decides to purchase the shares, it is authorized to reduce the share capital to that extent. Even though the rate of interest may appear to be higher, we have decided on this rate, taking into consideration the facts of this case. In case, the petitioners are interested in selling their shares, they should intimate the same to the respondents, in wring, within a month from the date of this order, whereafter the respondents should pay the consideration for the shares as computed above and interest on the loan within a month thereafter in exchange for the shares to be delivered along with blank transfer forms.

24. With the above observations/directions we dispose of this petition without any order as to cost.

(C.R.Mehta) (S.Balasubramanian)

New Delhi, the 14^th day of March 2001.