Girdhar Gopal Gupta
& Ors. Vs. Aar Gee Board Mills Pvt. Ltd. & Ors.  INSC 195 (2
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
Dr. ARIJIT PASAYAT, J.
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.
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 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.
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.
(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 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 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.
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
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.
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 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.
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 was inferred that Gupta Group had information about the
allotment of shares in the year 1994 and challenge was made only in the year
Accordingly, it was
held that the view taken by the Board was plausible and possible view and the
interference was not called for.
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.
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%.
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."
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.
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.
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.
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 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:
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 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.
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.
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 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.
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.
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 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.
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.
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 parties and their understanding of the
situation largely determines the basic issue.
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.
appeal is dismissed. There will be no order as to costs.
(Dr. ARIJIT PASAYAT)
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