COMPANIES ACT, 1956:Secs.397 and 398

                                            REPORTABLE

                 IN THE SUPREME COURT OF INDIA

                  CIVIL APPELLATE JURISDICTION

                CIVIL APEPAL NO. 601             OF 2009
                (Arising out of SLP (C) No. 4364 of 2006)



Girdhar Gopal Gupta and Ors.                          ...Appellants



                                 Versus



Aar Gee Board Mills Pvt. Ltd. and Ors.                ...Respondents




                            JUDGMENT



Dr. ARIJIT PASAYAT, J.



1.    Leave granted.
2.    Challenge in this appeal is to the judgment of a Division Bench of the

Delhi High Court dismissing the appeal filed by the appellants as not

maintainable. Challenge in the appeal was to the judgment of a learned

Single Judge of High Court. Two appeals were disposed of by a common

order dated 7.2.2005.



3.    Background facts in a nutshell are as follows:



      M/s Aar Gee Board Mills was incorporated as private limited

company in which two groups hold the shares. One group is led by Girdhar

Gopal Gupta (hereinafter referred to as `Gupta Group') and other by Guru

Charan Dass (hereinafter referred to as `Garg Group'). The company was

incorporated with authorized share capital of Rs.20 lacs (20,000 equity

shares of Rs.100/- each). At the time of incorporation, the Gupta Group

subscribed 1722 equity shares and the Garg Group was allotted 1662 equity

shares. The shareholding between the two groups was accordingly in the

ratio of 50.9% : 49.1%. This company purchased a sick unit from UPFC in

the year 1985 consisting of land at GT Road Industrial Area Ghaziabad

measuring 7215 sq. yards along with the plant and machinery. The company

operated the aforesaid unit for few years after its purchase. However, in



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October 1994 this unit had to be closed down. Reasons were stated to be

non-installation of water treatment plant for pollution control and non

payment of Government dues. Both the groups alleged non cooperation and

mis-management against each other.



      After the closure of the aforesaid unit, disputes arose between the

parties. Both the parties referred the matter for arbitration. Three arbitrators

were appointed who gave their awards. In the final award given on 18th

April, 1998 the arbitrators inter-alia concluded that the aforesaid unit should

be divided equally between the two groups. There is some dispute about the

terms of reference to the aforesaid arbitrators. Fact remains that although

proceedings before the said arbitrators were initiated under the Arbitration

Act, 1940 and, therefore, awards were required to be made rule of the Court,

but no steps were taken in this behalf by either of the groups.



      On 20th August, 1998, Garg Group filed the return with the Registrar

of Companies informing the Registrar of Companies about the allotment of

9507 equity shares of Rs.100/- each which was allotted in favour of the

members of the Garg Group. It was stated that these allotments were made

in the years 1994 and 1995.



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      With the allotment of aforesaid shares in favour of the family

members of the Garg group the shareholding pattern changed drastically.

The shareholding of the Gupta Group which was hitherto to the extent of

50.9% came down to 13.4% and that of the Garg Group rose to 86.6%.



      Aggrieved by this and some other acts on the part of the Garg Group,

Gupta Group filed CP.65/2001 under Sections 397 and 398 of the

Companies Act, 1956 (in short the `Act') before the Company Law Board

(for short the `Board') alleging oppression and mis-management on the part

of the Garg Group. Three acts of oppression and mis-management were

highlighted which are as under:



(a)   Illegal allotment of 9507 equity shares as noted above.

(b)   Appointment of Mr. Parmanand, brother of Mr. Guru Charan Dass

Garg as the Additional Director with effect from 20th October, 1994, return

in respect of which was also filed with the Registrar of Companies on 20th

August, 1998.




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(c)   Removal of Mr. Girdhar Gopal Gupta and Mr. Ram Narain Gupta as

directors from the company on 16th September, 1998 without notice of any

Board meeting.



      The Board decided this petition vide order dated 25th March, 2004. As

far as issue of allotment of shares is concerned, the Board opined that

allotment of 5564 shares to the Garg group was illegal and set aside the

same. In so far as allotment of 3943 shares is concerned, benefit of doubt

was given to the Garg Group on the ground that this allotment was within

the knowledge of the Gupta Group.



      On the two counts, this petition was decided in favour of the Gupta

Group as it is held that appointment of Mr. Parmanand as Additional

Director was invalid. Likewise, removal of Mr. Girdhar Gopal Gupta and

Mr. Ram Narain Gupta as directors was also held to be illegal.



      The Gupta group has preferred Co.A.(SB) No.9/2004 against that

portion of the Order whereby allotment of 3943 shares is not disturbed. The

Garg Group on the other hand, filed Co.A.(SB) No.11/2004 in respect of

other findings which were returned in favour of the Gupta group. That is



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how these appeals wee heard together and were disposed of by a common

Order.



      In so far as issue of allotment of shares is concerned, Board in para

12 held as follows:



         "The last point for consideration is the allotment of 9507
         equity shares which have been allotted on 25.6.1994,
         20.10.1994, 9.1.1995. The respondents have failed to produce
         notice/minutes of the board meeting in which 9507 shares
         were allotted. The return of allotment of shares in Form No. 2
         has been filed in one lot on 20.8.1998 with the ROC after a
         delay of 4 years. The respondents have submitted that in the
         balance sheet signed of 1993-94 by the petitioner indicated
         application money of Rs.3,94,320 and accordingly the
         petitioners were aware of allotment of 9507 shares. It is true
         that a sum of Rs. 3,94, 320/- has been shown in the balance
         sheet of 1993-94 which the respondents have allotted further
         shares of Rs.5,56,380 for which no explanation has been
         given. It is also not known whether any money amount to
         Rs.5,56,380/- was ever received by the company and how
         the same has been utilized in the company which was closed
         down in 1995."




      The High Court noted that the Board recorded a categorical finding

that the respondents in the petition i.e. Garg Group had failed to produce

notice/minutes of the Board meeting in which 9507 shares were allotted. It

was also recorded that although these shares were allotted in two lots in


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1994 and 1995, return of allotment of these shares was filed in one lot on

20th August, 1998 with the Registrar of Companies after a delay of 4 years.

However, the allotment of shares to the extent of 3943 shares only was

distributed on the ground that the Gupta Group would have the knowledge

much earlier but it was not challenged earlier. Accordingly, the Board

declared the allotment of 5564 shares as illegal and the same was set aside.

Learned Single Judge first referred to this aspect. He noted that the Garg

Group had failed to produce any notice or minutes of the Board meetings

regarding allotment of shares.



4.    Learned counsel appearing for the Garg Group did not dispute this

position before the learned Single Judge at the time of arguments. His only

argument was that the records of the company were in possession of the

Gupta Group and therefore his client could not produce the records to the

aforesaid effect.



5.    Learned Single Judge noted that there was some controversy about

the possession of company's records. Though learned counsel appearing for

the Gupta Group referred to the final award of Arbitrators wherein it has

been recorded that some records were in possession of the Garg Group, yet



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the High Court did not go into this aspect because the categorical

submission of Gupta Group in the petition was that there was no notice of

allotment of shares and there was no decision of the Board of Directors to

allot the shares. The allegations were not traversed by the Garg Group in

their reply filed. The High Court noted that the respondents never came out

with a case that there was no such notice for allotment of shares given to the

existing shareholders or there was any such decision taken by the Board of

Directors   for allotment of shares. That part of the Board's order was

therefore confirmed.



6.    The residual issue was the balance 3943 shares. Here again, a

categorical finding recorded was that there was no notice or Board's

decision for allotment of shares. However, benefit of doubt was given as

share application money was reflected in the Balance Sheet of the company

as on 31.3.1994. It indicated share application money of Rs. 3,94, 320/-.

The original Balance Sheet was produced which shows that it bears the

signature of Mr. Girdhar Gopal Gupta as well as Mr. Guru Charan Dass

Garg. The Board from the aforesaid entry in the Balance Sheet came to

conclude that allotment of these shares were within the knowledge of Gupta

Group. The High Court held that such knowledge cannot be ruled out. It



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was inferred that Gupta Group had information about the allotment of

shares in the year 1994 and challenge was made only in the year 2001.

Accordingly, it was held that the view taken by the Board was plausible and

possible view and the interference was not called for.



7.    So far as the question relating to removal of two Directors of Gupta

Group and induction of Directors of Garg Group is concerned, the High

Court did not interfere with the decision of the Board. It was felt that it was

an academic exercise as admittedly the company was not functioning since

1993 and the only aspect relevant for the purpose would be the distribution

of assets of the company.



8.    Learned counsel for the appellant submitted that allotment of shares

could only be done by the Board of Directors and there is no presumption in

law of allotment of shares merely because of receipt of share application

money. It is pointed out that benefit of doubt had been given to the

respondents to the extent of 3943 shares as a result of which the appellants

who had a slight majority of shareholding of 50.9 % have been reduced to

23.5% and the respondents who originally held 49.1% shares have been

increased to 76.5%.



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9.    Reference is made to Article 8 of the Articles of the Company which

shows that the shares have to be under the control of the Board and the

Board has the power to allot or dispose of the same. The same reads as

follows:


             "The shares be under the control of the Board who may
      allot or otherwise dispose of the same to such persons on such
      terms and conditions and at such time as the Board may think
      fit but subject to the Articles herein contained and also to the
      restrictions mentioned in the foregoing clause 2 hereof."



10.   The concurrent finding is that no notice of the Board meeting was

given and no Board's meeting was held in respect of allotment of shares.

The said finding has not been under challenge by the respondents and it has

become final. It is, therefore, submitted that two different yardsticks cannot

be applied for 5564 shares and 3943 shares. In essence, it is submitted that

the courts below have erred in giving benefit of doubt in respect of 3943

shares merely because a sum of Rs.3,94,320/- were shown as share

application money in the Balance Sheet as on 31.3.1994. It is submitted that

records are not in possession of the appellants and have been categorically

found to be in possession of the respondents. It is also submitted that the

approach under Sections 397 and 398 of the Act was not belated.


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Oppression in converting majority shares to minority shares is continuous

one and, therefore, there is continuous oppression. It is stated that the

appellants learnt about the ostensible issue of shares by the respondents

only when they carried out the inspection with the Registrar of Companies

in the year 2000. Appellants sent a letter on 3.4.2000 to the respondents

intimating about the issuance of shares. Since there was no satisfactory

reply, petition under sections 397 and 398 of the Act was filed.



11.   So far as the receipt of share application money is concerned the

Balance Sheet only shows that it was under the head of `share application

money' and there was no allotment.



12.   In response, learned counsel for the respondents submitted that the

case of the appellants before the Board was that the respondents have raised

the share capital of Rs.3,94,320/- by allotting 3943 shares at Rs.100/- each

on 25.6.1994, 20.10.1994 and 9.1.1995 without issuing notice of such

meetings to the appellants. It is pointed out that admittedly the meetings

were held at the registered office of the company i.e. the residence of the

appellants and as such allotments made by the respondents lead to an act of

oppression under Section 398 of the Act. It is pointed out that the totally a



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new case is presented before this Court that no meeting for allotment of

alleged equity shares were ever held and the share application money

reflected in the Balance Sheet ending on 31.3.1994 cannot be converted into

share capital and therefore the allotment is bad under Section 286 of the Act

admittedly, when the quorum of Directors was duly empowered to do so.

Moreover, both the Directors were signatories of the Memorandum and

Articles of Association of the Company. It is pointed out that undisputed

facts are as under:



13.   The registered office of respondents 1 and 2 was at 73, Gujarawala

Town, Part-II, G.T. Karnal Road, Delhi which is the residence of the

appellants. All the Board's meetings were held and resolutions therein were

passed at the same registered office. Moreover, all the statutory records

were kept at the registered office as mandated by Sections 193, 196(1), 303

(1), 307(5) and 209 of the Act. The company was passing through financial

crises and there was need to meet the government dues and installation of an

effluent treatment plant in view of the directions of this Court. The quorum

under the Articles of Association was two Directors as per Clause 33 of the

Article of Association. Two persons were present in the meeting. The

Board of Directors allotted 3943 equity shares when the requisite quorum of



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two Directors of the respondent group was there. In the meetings held on

25.6.1994, 20.10.1994 and 9.1.1995 at the registered office as per Clause 33

of the Articles of Association as well as under Section 287 of the Act.

Auditor was appointed under Section 224 and power of attorney was signed

by appellant No.1 on 4.9.1995 for which meeting was held and Balance

Sheet as on 31.3.1995 was audited by the auditor on 4.9.1995 under Section

215 of the Act. Significantly, no mala fides have been imputed on the part

of the auditor and no allegations of fraud or mala fide intention were

imputed upon the respondents before the Board, learned Single Judge and

not even before this Court.



14.   There is no dispute that the Balance Sheet as on 31.3.1994 was duly

signed by appellant No.1 and share application money amounting to

Rs.3,94,320/- was reflected as share application money in the Balance Sheet

with mutual understanding that the same was to be treated as share capital

in next financial year ending on 31.3.1995.



15.   To give effect to the understanding, the same was converted on

25.6.1994, 20.10.1994 and 9.1.1995. Resolution dated 21.4.1997 was

passed and signed by appellant No.1 authorising respondent No.2 for



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getting sales tax and income tax assessment completed. In the sales tax

assessment proceedings appellant No.1 was representing the company. The

Balance Sheet was filed at that time before the Assessing authority. An

order dated 16.6.1998 for the assessment year 1994-95 clearly disclosed that

appellant No.1 had appeared before the Sales Tax Authority on 3.6.1998

and produced records of the company. Thus, the Balance Sheet of the

company as on 31.3.1995 was available with appellant No.1 and produced

before the Sales Tax Authority. Therefore, the claim of the ignorance of the

records by the appellants is wrong.



16.   It is pointed out that because of rising prices of estates of the

company the petition under Sections 397 and 398 of the Act was filed on

20.10.2001. However, the returns for allotment of 9507 shares including

3943 shares were filed before the Registrar of Companies on 20.8.1998.



17.   It is submitted that the plea relating to Section 286 is not available in

the present case as meeting admittedly held and the proof of service of

notice was in the possession of the appellants as part of statutory record.

Even after the meeting on 4.9.1995 wherein auditors were appointed the

earlier meetings of the board are ratified and the appellants cannot question



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that. If the appellants' claim is accepted it is inconceivable as to how share

application money shown has been utilized in the subsequent years and as to

how they were reflected in the Balance Sheet.



18.   So far as the other submissions relating to records manipulations it is

submitted that this is not a case where jurisdiction under Article 136 of the

Constitution should be exercised.



19.   We find that there are some factual controversies, for example, the

effect of the appellants ratifying the Balance Sheet, appearing before the

Sales Tax Authorities and the undisputed position with respect to share

application money as reflected in the financial statements. It is difficult to

believe that even though the conversion of the share application money was

done in June 1994, October, 1994 and January 1995, it was not in the

knowledge of the appellants. The fact that the appellants were representing

the company before various authorities including the Sales Tax Authorities

and Income Tax Authority clearly rules out the possibility of appellants

being unaware of the situation. It is true that the allotment of shares is

different from receipt of share application money but the conduct of the




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parties and their understanding of the situation largely determines the basic

issue.

20.      Considering the nature of the controversy we do not consider this to

be a fit case where any interference under Article 136 of the Constitution is

called for.



21.      The appeal is dismissed. There will be no order as to costs.




                                         ..........................................J.
                                         (Dr. ARIJIT PASAYAT)


                                         ..........................................J.
                                         (P. SATHASIVAM)


                                         ..........................................J.
                                         (AFTAB ALAM)
New Delhi,
February 2, 2009




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