# M/S. DALE AND CARRINGTON INVT. P. LTD. AND ANOTHER v. P.K. PRATHAPAN AND OTHERS

- **Citation:** [2004] Supp. 4 S.C.R. 334
- **Court:** Supreme Court of India
- **Decided:** 2004-09-13
- **Case number:** Civil Appeal Nos. 5915-5916 of 2002
- **Bench:** Ruma Pal, Arun Kumar
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/m-s-dale-and-carrington-invt-p-ltd-and-another-v-p-k-prathapan-and-others-20196
- **Pages:** 29

## Headnote

Company law:
Company affairs-Duties and power of Directors-Fiduciary capacity
within which they have to act-"Proper-purpose doctrine" regarding dutiesDiscussed.
Private limited company-Act of oppression-Allotment of additional
shares in favour of Managing Director resulting in majority shareholder
being reduced to minority shareholder-Neither found in the interest of the
D
company nor a proper and legal procedure followed-Motive for allotment
found malafide, only motive being to gain control of the company-Clear
case of oppression against majority shareholder-Hence, the allotment set
aside.
E
F
Companies Act, 1956 :
Section 81-Private limited company-Issuance of additional sharesPower of Directors-Non-applicability of S.81 in case of private limited
companies-Helri, casts a heavier burden on its Directors-Does not mean
that the Directors have absolute freedom in the matter of management of
affairs of the company.
Sections 397 & 398-Petition under-Maintainability-Locus standiPrivate limited company-Petitioners were registered as shareholders of the
company on the date of filing of the petition and held requisite number of
shares in the company-Hence, they could maintain the petition.
G
Section l OF-Power of High Court in appeal under-Scope of-Held,
the judgment of Company law Board having been given in a very cursory
and cavalier manner and it not having gone into rear issues germane for
decision of the controversy involved, High Court rightly went into depth of
the matter-It did not exceed its jurisdiction under S. I OF while deciding the
H
appeal.
334
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRA THAPAN
335
R(Appellant 2) and P and his wife (Respondents I and 2), are the
A
contesting parties in this litigation. Appellant 1 is the private limited
company in which they are all shareholders and the litigation is about
is control and management, with both parties making claims to the right
to control and manage the company.
In this appeal· directed against the judgment of the High Court, the
following issues arose for consideration:
I. Validity of allotment of equity shares of the Company in favour
B
of R whereby he becomes a majority shareholder and P and his wife are
reduced to minority shareholders. This issue gives rise to the following
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questions: (a) Was a meeting of the Board of Directors of the Company
held on 24th October, 1994 when the first allotment of additional shares
in favour of R is said to have been made? (b) Was it valid meeting of
the Board of Directors of the Company? (c) Did the Company require
funds so as to necessitate raising of share capital of the company by
issuing equity shares? (d) Was the alleged allotment of equity shares in
favour of R a bona.fide act on the part of Board of Directors in the
interest of the Company? In other words does the act of raising share
capital by allotment of additional equity shares in favour of R, the
Managing Director, amount to an act of oppression on his part towards
the then majority shareholders?
2. What is the effect of not obtaining permission of the Reserve
Bank of India under the Foreign Exchange Regulation Act (FERA) by
P regarding transfer of shares in his and his wife's favour? Did P and
his wife have no locus standi to file the petition under Sections 397 and
398 of the Companies Act before the Company Law Board?
3. Scope of power of the High Court in an appeal under Section
IOF of the Companies Act.
D
E
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4. Relief to be granted to a majority shareholder who by an act of G
oppression 011 the part of management of the company is converted into
a minority shareholder.
Dismissing the appeals, the Court
HELD: l. A company is a juristic person and it acts through its
H
336
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
A
Directors who are collectively referred to as the Board of Directors. An
individual Director has no power to act on behalf of a company of which
he is a Director unless by some resolution of the Board of Directors of
the company _specific power is

## Text

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A
M/S. DALE AND CARRINGTON INVT. P. LTD. AND ANOTHER
B
c
v.
P.K. PRATHAPAN AND OTHERS
SEPTEMBER 13, 2004
[RUMA PAL AND ARUN KUMAR, JJ.]
Company law:
Company affairs-Duties and power of Directors-Fiduciary capacity
within which they have to act-"Proper-purpose doctrine" regarding dutiesDiscussed.
Private limited company-Act of oppression-Allotment of additional
shares in favour of Managing Director resulting in majority shareholder
being reduced to minority shareholder-Neither found in the interest of the
D
company nor a proper and legal procedure followed-Motive for allotment
found malafide, only motive being to gain control of the company-Clear
case of oppression against majority shareholder-Hence, the allotment set
aside.
E
F
Companies Act, 1956 :
Section 81-Private limited company-Issuance of additional sharesPower of Directors-Non-applicability of S.81 in case of private limited
companies-Helri, casts a heavier burden on its Directors-Does not mean
that the Directors have absolute freedom in the matter of management of
affairs of the company.
Sections 397 & 398-Petition under-Maintainability-Locus standiPrivate limited company-Petitioners were registered as shareholders of the
company on the date of filing of the petition and held requisite number of
shares in the company-Hence, they could maintain the petition.
G
Section l OF-Power of High Court in appeal under-Scope of-Held,
the judgment of Company law Board having been given in a very cursory
and cavalier manner and it not having gone into rear issues germane for
decision of the controversy involved, High Court rightly went into depth of
the matter-It did not exceed its jurisdiction under S. I OF while deciding the
H
appeal.
334
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRA THAPAN
335
R(Appellant 2) and P and his wife (Respondents I and 2), are the
A
contesting parties in this litigation. Appellant 1 is the private limited
company in which they are all shareholders and the litigation is about
is control and management, with both parties making claims to the right
to control and manage the company.
In this appeal· directed against the judgment of the High Court, the
following issues arose for consideration:
I. Validity of allotment of equity shares of the Company in favour
B
of R whereby he becomes a majority shareholder and P and his wife are
reduced to minority shareholders. This issue gives rise to the following
C
questions: (a) Was a meeting of the Board of Directors of the Company
held on 24th October, 1994 when the first allotment of additional shares
in favour of R is said to have been made? (b) Was it valid meeting of
the Board of Directors of the Company? (c) Did the Company require
funds so as to necessitate raising of share capital of the company by
issuing equity shares? (d) Was the alleged allotment of equity shares in
favour of R a bona.fide act on the part of Board of Directors in the
interest of the Company? In other words does the act of raising share
capital by allotment of additional equity shares in favour of R, the
Managing Director, amount to an act of oppression on his part towards
the then majority shareholders?
2. What is the effect of not obtaining permission of the Reserve
Bank of India under the Foreign Exchange Regulation Act (FERA) by
P regarding transfer of shares in his and his wife's favour? Did P and
his wife have no locus standi to file the petition under Sections 397 and
398 of the Companies Act before the Company Law Board?
3. Scope of power of the High Court in an appeal under Section
IOF of the Companies Act.
D
E
F
4. Relief to be granted to a majority shareholder who by an act of G
oppression 011 the part of management of the company is converted into
a minority shareholder.
Dismissing the appeals, the Court
HELD: l. A company is a juristic person and it acts through its
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336
SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
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Directors who are collectively referred to as the Board of Directors. An
individual Director has no power to act on behalf of a company of which
he is a Director unless by some resolution of the Board of Directors of
the company _specific power is given to him/her. Whatever decisions are
B
c
taken regarding running the affai~s of the company, are taken by the
Board of Directors. The Directors of companies have been variously
described as agents, trustees or representatives, but one thing is certain
that the Directors act on behalf of a company in fiduciary capacity and
their acts and deeds have to be exercised for the benefit of the company.
J'hey are agents of the company to the extent they have been authorised
to perform certain acts on behalf of the company. In a limited sense they
are also trustees for the shareholders of the company. To the extent the
power of the Directors are delineated in the Memorandum and Articles
of Association of the company, the Directors are bound to act accordingly.
As agents of the company they must act within the scope of their authority
and must disclose that they are acting on behalf of the company. The
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fiduciary capacity within which the Directors have to act enjoins upon
them a duty to act on behalf of a company with utmost good faith,
utmost care and skill and due diligence and in the interest of the company
they represent. They have a duty to make full a·nd honest disclosure to
the shareholders regarding all important matters relating to the company.
E
(350-H; 351-A, B, C, DJ
Mis. Needle Industries (India) Ltd. and Others v. Needle Industries
Newey (India) Holding Ltd. and Others, (1981) 3 SCC 333 and Tea
Brokers(P) Ltd. v. Hemendra Prasad Barooah, ·(1998) 5 Company Law
Journal 463, relied on.
F
Regal (Hastings) Ltd. v. Gulliver and Others, (1942] 1 All ER 378;
Alexander v. Automatic Telephone Co., (1900) 2 Ch. 56; Punt v. Symons,
(1903) 2 Ch 506; Piercy v. S. Mills & Co. Ltd., (1920) 1 Ch 77; Hogg v.
Cramphorn Ltd., (1967) 1 Ch 254; Howard Smith Ltd. v. Ampol Petroleum
Ltd., (1974) AC 821; Rolled Steel Products (Holdings) Ltd. v. British Steel
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Corporations, (1986) Ch 246; Bishopgate Investment Management Ltd. v.
Maxwell (No.2), (1994) 1 All ER 261 and Whitehouse v. Car/to Hotel Pty.
Ltd., (1987) 162 CLR 285, referred to.
2.1. In the matter of issue of additional shares, the Directors owe
a fiduciary duty to issue shares for a proper purpose. This duty is owed
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by them to the shareholders of the company. Therefore, even though
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DALE & CARRINGTON INVT. P. LTD. v. P.K. PRATHAPAN
337
Section 81 of the Companies Act, 1956, which contains certain
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requirements in the matter of issue of further share capital by a company,
does not apply to private limited companies, the Directors in a private
limited company are expected to make a disclosure to the shareholders
of such a company when further shares are being issued. This
requirement flows from their duty to act in good faith and make full
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disclosure to the shareholders regarding affairs of a company. The acts
of Directors in a private limited company are required to be tested on
a much finer scale in order to rule out any misuse of power for personal
gains or ulterior motives. Non-applicability of Section 81 of the
Companies Act in case of private limited companies casts a heavier
burden on its Directors. Private Limited companies are normally closely
held i.e. the share capital is held within members of a family or within
a close-knit group of friends. This brings in considerations akin to those
applied in cases of partnership where the partners owe a duty to act
with utmost good faith towards each other. Non-applicability of Section
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81 of the A"ct to private companies does not mean that the Directors
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have absolute freedom in the matter of management of affairs of the
company. (351-E, F, G, HJ
2.2. Common law recognised a pre-emptive right of a shareholder
to participate in further issue of shares. In India in view of Section 81
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of the Compariies Act, such a right cannot be found for sure. However,
the test to be applied in such cases, which requires the court to examine
as to whether the shares were issued bona fide and for the benefit of the
company, would import such considerations in case of private limited
companies under the Indian law. Existence of right to issue shares to
one Director may technically be there, but the question whether the
right has been exercised bona fide and in the interests of the company
has to be considered in the facts of each case and if it is found that it
is not so, such allotment is liable to be set aside. (358-E, FI
3. The facts on record show that the company was being run as one
man show and R was maintaining the Minutes book of meetings of
Board of Directors only to comply with the statutory requirement in
this behalf. The minutes were being recorded by him according to his
choice and at his instance and did not reflect the actual position. Neither
a copy of a notice convening the Board meeting nor the logbook meant
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SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.
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to record signatures of Directors attending the meeting of the Board of
Directors was produced. In the absence of these documents and any
other proof to show that a meeting was held as alleged, it cannot be
accepted that a meeting of the Board of Directors was held on 24-101994. If no meeting of the Board of Directors took place on that date,
B
the question of allotment of shares to R does not arise. The Court is
inclined to believe that photocopy of the minutes of the alleged meeting
dated 24-10-1994 produced by the appellants, is sham and fabricated.
[349-E, A, BJ
4.1. Normally, this Court would not have gone into these questions
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of fact. However, the appellant drew the Courts attention to the various
Articles of Association of the company, which unfortunately neither the
Company Law Board nor the High Court considered. [349-C, DJ
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4.2. The Articles of a company are its constituent document and are
binding on the company and its Directors. In the present case Article 4(iii)
of t~e Articles of Association prohibits any invitation t<> the public for
subscription of shares or debentures of the company. The intention from
this appears to be that the share capital of the company remains within a
close-knit group. Therefore, if the Directors fail to act in the manner
prescribed they can be held liable for breach of trust for misapplying
funds of the company and for misappropriating its assets. (352-A, B]
4.3. The Articles of Association require that decisions regarding
issue of further issue of capital to be taken in a meeting of the Board of
Directors, and the Court has found that the alleged meeting of the Board
of Directors in which the additional shares are purported to have been
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issued in favour of R was sham. Assuming for the sake of argument that
meetings of the Board of Directors did take place, the manner in which
the shares were issued in favour of R without informing other
shareholders about it and without offering them to any other shareholder,
the action was totally ma/a fide and the sole object of R in this was to
G
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gain control of the company by becoming a majority shareholder This
was clearly an act of oppression on the part of R towards the other
shareholder who has been reduced to a minority shareholder as a result
of this act. Such allotments of shares have to be set aside. [352-D, E)
5. It appears that R, who was managing the affairs of the company
single-handedly, realised that the company had turned around and the
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRA THAPAN
339
hotel property had appreciated in terms of its market value. He started
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working on a strategy to get controlling shares in the company. It was
in furtherance of this objective that R managed to show the entry
regarding advance against shares in the balance sheet as on 31-3-1994.
For this amount, he allotted equity shares to himself to gain control of
the company. In these facts it is difficult to appreciate that additional
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funds were required by the company. The finding of the High Court
that no funds were needed by the company is fully justified. The
conclusion is inevitable that neither the allotment of additional shares in
favour of R was bona fide nor it was in the interest of the company nor
a proper and legal procedure was followed to make the allotment. The
motive for the allotment was mala fide, the only motive being to gain
control of the company. In fact, the High Court has gone on to conclude
that R has played a fraud on the minority shareholders by manipulating
the allotment of shares in his favour. There is no reason to differ with
the finding of the High Court. [350-D, E; 359-D, E, F, G)
6. The only relief that has to be granted in the present case is to
undo the advantage gained by R through manipulations and fraud. The
allotment of all the additional shares in favour of R has to be set aside.
The High Court was fully justified in granting the relief of setting aside
the impugned allotments of additional shares in favour of R. The
approach of the Company Law Board was totally erroneous inasmuch
as after having found that there was oppression on the part of R, he was
still allowed to take advantage of his own wrong inasmuch as he was
given the option to buy P's shares and that too not for a proper price.
The Company Law Board was wrong in allowing purchase of share of
P and his wife by R. Such an order amounts to re'Yarding the wrongdoer
and penalising the oppressed party. In the circumstances of this case,
asking the oppressed to sell his shares to the oppressor not only fails to
redress the wrong done to the oppressed, it also results in heavy monetary
loss to him. The relief granted by the High Court was a proper relief in
the facts of the case. [362-D, E, F, G)
7.1. The entire scheme regarding purchase of shares in the name of
mother of P was suggested by R himself. He saw to it that the shares
were transferred by the company in the name of P and his wife. The
company has recorded the transfer and corrected its Register of Members
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in this behalf which, in fact, led R to file a petition for rectification of H
340
SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.
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the Register of Members as a counter/blast to the petition filed by P
under Sections 397/398 of the Companies Act. It is not open to R now
to raise the question of FERA violation, more particularly in view of his
having recorded the transfer of shares in the name of P and his wife in
the records of the Company. This also answers the objection regarding
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locus standi of P and his wife to file the petition under Sections 397 /398
before the Company Law Board. Since they were registered as
shareholders of the company on the date of filing of the petition and
they held the requisite number of shares in the company, they could
maintain the petition. [360-H; 361-A, B, Cl
c
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Rajahmundry Electric Supply Corporation ltd. v. A. Nageshwara Rao
and Others, AIR (1956) SC 213, relied on.
S. Varadarajan v. Venkateswara Solvent Extraction (P) ltd., (1994) 80
Company Cases 693 and Jawahar Singh Bikram Singh v. Sharda Ta/war,
(1974) 44 Company Cases 552, referred to.
7.2. So far as the question of permission of the Reserve Bank of
India under FERA is concerned the same can be obtained ex-post facto.
The statute does not provide any time limit for obtaining the permission.
One cannot lose sight of the subsequent development in this connection.
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FERA stands repealed and the statute brought in force by way of
replacement of FERA, i.e. the Foreign Exchange Management Act
(FEMA), does not contain any such requirement. [360-A, B, CJ
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Life Insurance Corporation of India v. Escorts, (1986) 1 SCC 264,
relied on.
8. Section IOF refers to an appeal being filed on the question of
law. It cannot be said that the High Court could not have disturbed the
findings of fact arrived at by the Company Law Board and to have
recorded its own finding on certain issues which the High Court could
not go into. It is settled law that if a finding of fact is perverse and is
based on no evidence, it can be set aside in appeal even tho~gh the
appeal is permissible only on the question of law. The perversity of the
finding itself becomes a question of law. In the present case the judgment
of the Company Law Board was given in a very cursory and cavalier
manner The Board has not gone into real issues which were germane
for the decision of the controversy involved in the case. The High Court
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRATHAPAN[ARUN KUMAR, J.] 341
has rightly gone into the depth of the matter. [361-F, G, H]
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5915-5916
of 2002.
From the Judgment and Order dated 28.5.2002 of the Kerala High Court
in M.F.A. Nos. 586 and 551 of 2001.
WITH
C.A. Nos. 5917 and 5918 of 2002.
Dushyant A. Dave, Krishnan Venugopal, K.S. Venugopal, E.B. Shaji,
Nikhil Goel, Prasad Vijay Kumar, A. Venugopal and A.D. Sikri for the
Appellants.
S. Ganesh, Joseph Kodianthapa, Ajay K. Jain, Saji Kurup, Deepak
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B
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Prakash and M.P. Vinod for the Respondents.
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The Judgment of the Court was delivered by
ARUN KUMAR, J.: P.K. Ramanujam, appellant 2 and P.K. Prathapan
and his wife Pushpa Prathapan, respondents l and 2 are the contesting parties
in this litigation. Appellant l is the company in which they are all shareholders
and the litigation is about its control and management. Both parties are
making claim to the right to control and manage the company. Briefly the
facts are : Ramanujam had returned to kerala, his native place, after resigning
his job as an accountant in England in the year 1983. He was looking for
an opportunity to work. Prathapan, also native of Kerala, had been working
in Muscat since long and was staying there alongwith his family. The mother
of Parthapan, named Kalyani Kochuraman, was living in Kerala. Prathapan
had two sons. According to Prathapan his sons were desirous of returning
to India and settling down in their native place. Therefore, Prathapan v1anted
to set up some business in India in order to settle his sons. Since the parties
are relations they were in touch with each other. Towards the middle of 1987
Ramanujam informed Prathapan that a hotel called 'Hotel Siddharth' in a
town called Chalakudy, was available for sale. The hotel building had ten
rooms, besides a restaurant with a bar attached to it. The partners who were
running the hotel were interested in selling it immediately. Ramanujam
further informed Prathapan that the hotel was available for down payment
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SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.
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of Rs. 6 lakhs (Rupees six Lakhs). The purchaser, in addition, had to take
upon a liability of about Rupees 18 lakhs (Rupees eighteen lakhs) which was
standing on the hotel. Ramanujam offered to look after the business of the
hotel till Prathapan decided to return to India. The parties decided to go ahead
with the purchase of the hotel for which Prathapan agreed to send Rs. Five
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Lakhs. Ramanujam was to get a salary for the services to be rendered by him
in looking after the business of the hotel. A company by the name of Dale
and Carrington Investments Private Limited was incorporated on 4th
November, 1986 for the hotel business. Ramanujam and his wife Draupathy
were shown as the promoters of company. On the request of Ramanujam,
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Prathapan sent a Bank Draft in the sum of Rs. 5 lakhs (Rupees Five Lakhs)
favouring his mother Kalyani Kochuraman on 3rd March, 1987. The draft
was sent in the name of the mother because Prathapan was an NRI and the
company could not receive money directly form him. The device of money
being first sent in the name of Prathapan's mother and thereafter the mother
transferring it to the company, was suggested by Ramanujam in his letter
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dated 25th February, 1987 to Prathapan. The Hotel was accordingly acquired
by the company in March, ·1987. A sum of Rs. 6 lakhs (Rupees Six Lakhs)
was required to be paid in cash to the vendors out of which Rs. 5 lakhs
(Rupees five lakhs) were received from Prathapan and a sum of Rs. 50,000
(Rupees Fifty Thousand) was invested by Muralidharan, brother of Prathapan.
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The rest of the amount came from other respondents. There was no financial
contribution by Ramanujam. Initially Ramanujam and his wife Draupathy
were the Directors of the company: However in December, 1988 Draupathy
was dropped as Director and in her place Muralidharan, brother of Prathapan
and Suresh Babu, brother of Prathapan's wife, were taken as Directors of the
Company. 5000 (five thousand) equity shares worth Rupees five lakhs were
allotted in the name of Smt. Kalyani Kochuraman, mother of Prathapan
against the investment of Rupees Five Lakhs. These 5000 equity shares were
subsequently transferred in the name of Prathapan and his wife, 2500 (two
thousand five hundred) each, subject to the transferees obtaining requisite
permission of the Reserve Bank of India under the Foreign Exchange
Regulation Act (FERA). The transfer of shares in the name of Prathapan and
his wife Pushpa was duly record in the Register of Members maintained by
the company. Thus Prathapan and his wife Pushpa became shareholders of
the company to the extent to 2500 equity shares each.
Initially the company was making losses. However, by about year 199192, the company turned the comer. Copies of balance sheets of the company
DALE & CARRINGTON JNVT. P. LTD. v. P.K. PRA THAPAN[ARUN KUMAR, J.] 343
for a few years of its working have been placed on record by the appellant
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which show that till 31st March, 1992 there were no profits in the company.
For the first time some profits was shown as on 3 l st March, 1993. Till 31st
March, 1993, under the head 'Advance towards share capital pending
allotment' only a sum of Rs. 3000 (Rupees Three Thousand) was shown
whereas as on 31st March, 1994 under the s,,_id head, a balance of Rs.
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6,86,500 (Rupees six lakhs eighty six thousand five hundred only) was
shown. We have mentioned this figure here because it will be relevant for
the main controversy in this case.
It is the case of Prathapan that he continued to provide finance to the
company by sending money to Ramanujam from time to time. The details
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of some of such disbursements are as under :
(a)
A sum of Rs. 1,00,000 in March, 1989;
(b)
US$ 6300 in favour of Maruthi Udyog Ltd. for allotment of a
vehicle for the use of second appellant in November 1991;
(c)
A sum of Rs. one lakh in February, 1994;
( d)
A deposit of Rs. one lakh with State Bank of India in the year 1996
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to provide bank guarantee in favour of the sales tax authorities at
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Kera la;
(e)
A sum of Rs. Nine lakhs in January, 1996 for making remittance
in favour of the Sales Tax Authorities.
According to Prathapan he was to be issued shares of the company
against these remittances while according to Ramanujam the remittances
were on personal account in view of the close relationship between the
parties. The fact remains that the remittances were to Ramanujam and not
to the company.
In the beginning, the business of the company was carried on
by Ramanujam with the assistance of Muralidharan, brother of
Prathapan who was acting as Manager of the Company, while Ramanujam
was the Chainnan and Managing Director of the company. It was not denied
that Ramanujam was regularly getting salary for working as Managing .
Director of the company. According to Prathapan he was kept completely in
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SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
the dark about the affairs of the company throughout. He never received a
penny towards dividend on the shares held by him in the company.
Sometime in the year 1998 Prathapan is said to have come to India to
consider acquiring another Hotel for expanding the business of the company.
At that time he is said to have discovered certain startling facts about the
company. The most important fact which is at the centre of the controversy
in this case is that the company's authorised capital was increased from Rs.
15 lakhs to Rs. 25 lakhs and thereafter to Rs. 35 lakhs without the knowledge
of Prathapan, a principal, shareholder of the company. Further in an alleged
meeting of the Board of Directors of the company said to have been held
on 24th October, 1994, chaired by Ramanujam, the Board of Directors of the
company is said to have been informed about a sum of Rs. 6,86,500 (Rupees
six lakhs eighty six thousand five hundred only) standing standing to the
credit ofRamanuajum in the books of the company. He made a proposal for
allotment of shares in lieu of that amount in his favour. As- per the case of
Ramanujam the Board allotted 6,865 equity shares of Rs. 100 each in the said
meeting in his favour. According to Prathapan he was never made aware of
the increase in authorised share capital of the Company and the alleged
allotment of additional equity shares of the company in favour ofRamanujam.
The alleged allotment reduces Prathapan, who was a majority shareholder in
the company, to a minority shareholder in the company. Prathapan challenged
this alleged allotment of shares in favour ofRamanujam by filing a Company
Petition under Sections 397 and 398 of Companies Act before the CompRny
Law Board in July, 1999. The main challenge in the Company Petition filed
by Prathapan alongwith his wife as co-petitioner, was to the said alleged
allotment of 6865 equity shares of Rs. 100 each of the company. This was
alleged to be an act of oppression on the part of Ramanujam who was
managing the company. Prayer was made that the allotment of shares be set
aside, and necessary correction be made in the Register of Members of the
company. According to Prathapan Ramanujam did not contribute any money
from his own resources for purposes of the company while all along he drew
a handsome salary for working as the Managing Director. His maximum
investment in the company could not be more than Rs. 20,000. He committed
fraud and breach of trust as a result of which Prathapan and his wife had been
totally marginalised in the company. In fact, Muralidharan, brother of
Prathapan was removed from the Board of Directors of the company on l st
October, 1994 while Suresh Babu, brother-in-law of Prathapan and brother
of Pushpa, (Prathapan's wife) was removed was Director on 30th September,
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRA THAPAN(ARUN KUMAR, J.] 345
1996; Prathapan also alleged that Ramanujam siphoned off funds of the
company for personal gains ..
The Company Law Board took the view that Ramanujam had committed
an act of oppression by not only not informing him about issue of further
share capital of the Company but also not offering him the further share
capital which was being issue by the company. Having given a finding of
'oppression' in favour of Prathapan the Company Law Board while considering
relief, gave an option to Prathapan to sell his shares to Ramanujam. It was .
observed that a return of 12% per annum on tl'ie investment made by
Prathapan wouid be fair in the facts of the case. Prathapan and his wife, who
were petitioners in the company petition, were given liberty to sell their share
to Ramanujam at par value with 12% simple interest per year from the date
of their investment.
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During the pendency of the company petition filed by Prathapan, a
petition was filed before the Company Law Board for rectification of the
Register of Members so as to delete the entires recording of transfer of shares
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in favour of Prathapan and his wife. This was on the ground that they had
failed to obtain permission of the Reserve Bank of India under the Foreign
Exchan.ge Regulation Act regarding transfer of shares in their favour.
In the proceedings in the petition under Sections 397 and 398 of the
Companies Act, locus standi of Prathapan and his wife to file the petition
was challenged. This issue was decided by the Company Law Board against
Ramanujam. The petition for rectification of Register of members was
dismissed. However, Prathapan was aggrieved about the relief granted by the
Company Law Board. Inspite of the finding on oppression being in his
favour, he was asked to sell his shares and leave the company. Ramanujam
was aggrieved of the finding of oppression against him and of the dismissal
of the application for rectification of Register of Members. Both parties
approached the High Court of Kerala against the judgment of the Company
Law Board. The High Court maintained the judgment of the Company Law
Board so far as the rejection of petition for rectification of Register of
members was concerned. However, the High Court allowed the appeal filed
by Prathapan which was directed mainly on the question of relief granted by
the Company Law Board. The High Court took a serious view of the manner
in which Ramanujam was managing the affairs of the company. The High
Court held it to be an act of fraud on the part of Ramanujam in allotting 6865
equity shares of the company in his favour. The High Court further held that
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a perpetrator of fraud could not be allowed to take benefit of his own wrong.
The High Court found that the observation of the Company Law Board that
the appellants can sell their share at par value to the Managing Director,
getting 12% interest on their investment, will not be justified but will only
help the manipulator. The High Court ordered setting aside of allotment of
shares made in the Board Meetings held on 24th October, 1994 and 26 March,
1997, to Ramanujam, the Managing Director of the company. The Share
Register was ordered to be rectified accordingly. The present appeal by
Ramanujam is directed against the judgment of the High Court.
On the basis of the submissions made by the learned counsel for the
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parties, following issues arise for consideration.
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Issue 1.
Validity of allotment of equity shares of the Company
in favour of Ramanujam whereby he becomes a
majority shareholder and Prathapan and his wife are
reduced to minority shareholders.
This issue gives rise to following questions :
(a)
Was a meeting of the Board of Directors of the
Company held on 24th October, 1994 when the first
allotment of additional shares in favour of
Ramanujam is said to have been made?
(b)
Was it a valid meeting of the Board of Directors of
the Company?
(c)
Did the Company require funds so as to necessitate
raising of share capital of the company by issuing
further equity shares?
( d)
Was the alleged allotment of equity shares in favour
of Ramanujam a bonafide act on the part of Board
of Directors in the interest of the Company? In other
words does the act of raising share capital by
allotment of additional equity shares in favour of
Ramanujam, the Managing Director, amount to an
act of oppression on his part towards the then
majority shareholders?
DALE & CARRINGTON INVT. P. LTD. v. P.K. PRATHAPAN[ARUN KUMAR, J.] 347
Issue 2.
What is the effect of not obtaining permission of the
A
Reserve Bank of India under the Foreign Exchange
Regulation Act (FERA) by Prathapan regarding
transfer of shares in his and his wife's favour? Did
Prathapan and his wife Pushpa have no locus standi
to file the petition under Sections 397 and 398 of B
the Companies Act before the Company Law Board?
Issue 3.
Scope of power of the High Court in an appeal
under Section 1 OF of the Companies Act;
Issue 4.
Relief to be granted to a majority shareholder who
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by an act of oppression on the part of management
of the company is converted into a minority
shareholder.
Issue I.
Validity of allotment of equity shares
D
This is the main issue which arises for consideration in this case. As
already noted Ramanujam who was the Managing Director of the company
got allotted 6865 equity shares to himself in a meeting of the Board of
Directors of the company alleged to have been held on 24th October, 1994.
Again on 26th March, 1997 he managed to get allotted further 9800
equity share to himself. Prathapan has challenged these allotments of
shares in favour of Ramanujam as acts of oppression on the part of
Ramanujam, the Chairman and Managing Director of the company for which
he filed a petition under Sections 397 and 398 of the Companies Act before
the Company Law Board. A doubt has been cast about whether the alleged
meetings in which additional equity shares were allotted to Ramanujam were
held at all. In this behalf the following facts are noticeable :
(a) The appellants have filed a photocopy of the minutes of the alleged
meeting of the Board of Directors said to have taken place on 24th October,
1994. As per the photocopy the minutes appear to be signed by Ramanujam
as Chairman. The presence of Sutesh Babu as a Director of the Company
has been shown in the minutes. However, there is no evidence of presence
of Suresh Babu in the said meeting .. Article 36 of the Articles of Association
of the company requires that a notice convening the meetings of the Board
of Directors shall be issued by the Chairman or by one of the Directors duly
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authorized by the Board in this behalf. Suresh Babu filed an affidavit in the
proceedings before the Company Law Board wherein he has categorically
stated that at no point of time he was involved in the affairs of the company
and in running the business of the company. Further he has stated in the said
affidavit that at no point of time he was informed that he had been appointed
as Director of the company. He had never received any notice of any Board
Meetings nor had he ever attended any Board meeting. In view of this
categorical denial by Suresh Babu about attending any meetings of the Board
of Directors of the company, it was incumbent on the part of Ramanujam
who was the Chairman and Managing Director of the company and was in
possession of all the records of the Company, to place 'on record copy of
a notice calling a meeting of the Board of Directors in terms of Article 36.
No copy of the· notice intimating Suresh Babu about the meeting of the Board
of Directors and asking him to attend the same, has been placed on record
to show that Suresh Babu was informed about holding of the meeting in
question.
Here reference is required to be made to certain other Articles of the
company which are relevant for the controversy. Article 8 provides that
shares of the company shall be under the control of the Directors who may
allot the same to such applicants as they think desirable of being admitted
to membership of the company. Article 10 provides that allotment of shares
"shall exclusively be vested in the Board of Directors, who may in their
absolute discretion allot such number of shares as they think proper ... " Article
38 requires that the Directors present at the Board Meeting shall write their
names and sign in a book specially kept for the purpose. Article 4(iii)
prohibits any invitation to the public to subscribe for any shares or debentures
of the company. The above provisions of the Articles of Association show
that the Board of Directors have an absolute discretion in the matter of
allotment of shares. But this pre-supposes that such a decision has to be taken
by the Board of Directors. The decision is taken by the Board of Directors
only in meetings of the Board and not elsewhere. Ramanujam, the Managing
Director"cannot take a decision on his own to allot shares to.himself. IfSuresh
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Babu was Present in the meeting, as is the case of Ramanujam, he must have
signed a book specially kept for recording presence of the Directors at the
Board Meeting in terms of Article 38. Ramanujam should have been the first
person to produce such a book to show the presence of Suresh Babu at the
alleged Board meeting said to have been held on 24th October, 1994 specially
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when Suresh Babu was denying his presence at the meeting. Nothing has
DALE & CARRINGTON lNVT. P. LTD. v. P.K. PRATHAPAN[ARUN KUMAR, J.] 349
been produced. Thus neither a copy of a notice convening the Board meeting
nor the log book mean to record signatures of Directors attending the meeting
of the Boar~ of Directors were produced. In the absence of these documents
and any other proof to show that a meeting was held as alleged we are unable
to accept that a meeting of the Board of Directors was held on 24th October,
1994. If no meeting of the Board of Directors took place on that date, the
question of allotment of shares to Ramanujam does not arise. We are inclined
to believe that photocopy of the minutes of the alleged meeting dated 24th
October, 1994 produced by appellants, is sham and fabricated. The alleged
allotment of additional equity shares of the company in favour of Ramanujam
is, therefore, wholly unauthorized and invalid and has to be set aside.
Normally this Court would not have gone into these questions of fact.
However, the learned counsel for the appellant in the course of his arguments
drew our attention to the various Articles of Association of the company;
which unfortunately neither the Company Law Board nor the High Court
considered. We cannot help referring to them, particularly in view of the fact
that the Articles of a company are its constituent document and are binding
on the company and its Directors.
The facts on record show that the company was being run as one man
show and Ramanujam was maintaining the Minutes Book of meetings of
Board of Directors only to comply with the statutory requirement in this
behalf. The minutes were being recorded by him according to his choice and
at his instance. The minutes do not reflect the actual position. Article 38
mandated that a book should be maintained to record presence of Directors
at meetings of the Board of Directors. If a book for recording signatures of
Directors attending meetings of the Board of Directors was not maintained,
it was in clear violation of Article 38 of the Articles of Association of the
company. The Company Law Board without going into these relevant
aspects, proceeded on an assumption that a meeting of the Board of Directors
did take place on 24th October, 1994. This assumption of the Company Law
Board is clearly without any basis.
(b) When no meeting of the Board of Directors of the company was
held on 24th October, 1994, the question of validity of the meeting does not
arise. On the relevant date Suresh Babu was the only other Director of the
company. He denies having attended any meeting of the Board of Directors
of the company. There is nothing to rebut this stand of Suresh Babu. In his
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absence no valid meeting of the Board of Directors could be held.
(c) For considering this point let us assume that a meeting of the Board
of Directors of the company did take place as alleged by Ramanujam. First
question that arises is whether the company required additional funds for
which the shares were issued. We have already referred to .Balance Sheets
of the company, copies whereof have been placed on record, Till 3 lst March,
1993 the Balance Sheets did not show any investment of substantial amounts
of money in the company. It is the Balance Sheet for the 1year ending 31st
March, 1994 which for the first time shows an advance of Rs. 6,86,500
towards share capital pending allotment. Nothing has been placed on record
to show that during the financial year 1993-94 i.e. l st April, 1993 to 31st
March, 1994 suddenly need had arisen for a substantial investment. The
company was running a hotel, the property whereof was owned by the
company. No particular reason for making a major investment has been
shown. Nothing has been shown as to how the amount of Rs. 6,86,500 was
utilised. It appears that Ramanujam who was managing the affairs.of the
company single handedly, realized that the company had turned around and
the Hotel property had appreciated in terms of its market value. He started
working on a strategy to get controlling shares in the company.