Topic: Jer Rutton Kavasmanek & Anr vs Gharda Chemicals Ltd
Jer Rutton Kavasmanek & Anr vs Gharda Chemicals Ltd
Bombay High Court- Comp.Appeal No.24-10- In The High Court Of Judicature At Bombay - Ordinary Original Civil Jurisdiction - Company Appeal No.24 Of 2010 In Company Petition No.132 Of 2010 - Bench: S.C. Dharmadhikari - Date of Judgment: 14 June, 2011
1] This company Appeal is filed by the Appellants original Comp.Appeal No.24-10 Petitioners impugning the order passed by the Company Law Board, Mumbai (CLB) in Company Petition No.132 of 2009. By the order under challenge dated 14th May 2010, the learned Member of the CLB has dismissed this petition and vacated all interim orders therein.
2] This appeal has been admitted on the questions of law which have been framed by this Court in its order of Admission, dated 28th June 2010. The same read as under:-
"Heard all the parties. In my view, there are several important question of law which arise in this company appeal. Some of the questions of law which can be formulated are as under:-
"A. Section 111A is the only provision that talks of free transferability of shares. In view of section 111A read with section 111(14), the provisions of section 111A do not apply to a private company which had become a public company by virtue of section 43A. Accordingly, section 111A is not applicable to the present company;
"B. The 2000 amendment states that section 43A will not apply "on and after" its introduction. Therefore, companies that had acquired such status would continue to retain such status."
"C Alternatively and assuming that the 2000 amendment is construed as a "repeal" of section 43A under section 6 of the General Clauses Act such repeal would not disturb GCL's status."
Comp.Appeal No.24-10 "2. The questions of law that arise and which are enumerated herein above are not exhaustive. In the circumstances, company appeal is admitted.
3] Although this Court has in the order of 28th June 2010 observed that these questions of law are not exhaustive, yet, the arguments of the Senior Counsel appearing for parties revolve around these questions. I am of the opinion, therefore, that the questions as framed suffice for determination of the controversy.
4] The company petition on which the impugned order has been delivered pertains to a company known as Gharda Chemicals Ltd.
(GCL). The company petition was filed by the appellants against GCL and six others alleging that GCL is a closely held company and a glorified partnership. It was incorporated on 6th March 1967 under the Companies Act, 1956 as a private limited company. It is a closely held family company belonging to Gharda/ Kavasmaneck families. On 17th August 1988, the first respondent became a deemed public limited company pursuant to section 43A of the Companies Act, 1956.
Comp.Appeal No.24-10 5] It is alleged that at the meeting of the members held on 5th May 2001 a special resolution was proposed, inter alia, to insert an additional clause (d) in its Articles of Association pursuant to the Companies Amendment Act, 2000 (Amendment Act). The Resolution was not passed. After setting out details of the Authorised, subscribed and paid up share capital so also main objects of the GCL, it is alleged that the appellants - original petitioners are members of Kavasmaneck family. The first appellant is sister of the original second respondent and she was married to late Rutton Kavasmaneck. The second appellant is son of appellant No.1 and the late Rutton Kavasmaneck. They are part of a minority group of shareholders of respondent No.1 GCL. The appellants as members and shareholders of GCL amongst themselves hold and/or otherwise control 10516 equity shares aggregating to 17% approximately of the issued, subscribed and paid up capital on said GCL. After referring to the details of the shareholdings, it is alleged that as members of the said GCL, the appellants hold not less than 1/10th of the issued, subscribed and paid up share capital of GCL and are eligible under the provisions of section 399 of the Act to file the petition.
Comp.Appeal No.24-10 6] The Kavasmaneck family consists of the first appellant (mother) and her three children viz., the second appellant (son), one Maharookh Oomrigar (daughter) and one Percy Kavasmaneck (son). One Aban Kavasmaneck is the wife of the said Percy. The said Maharookh is presently in India but spends a considerable time with her daughter in the United States of America. The said Percy and the said Aban are presently residing in the United States of America. The said Maharookh, Percy and the Aban amongst themselves hold and or otherwise control 8115 shares aggregating to approximately 13% of the issued, subscribed and paid up share capital. The Kavasmaneck family accordingly holds and or otherwise controls 18,631equity shares aggregating to 30% approximately of the issued, subscribed and paid up share capital.
In addition to the Kavasmaneck family, there is also a Rebello family that holds and or otherwise controls 2640 equity shares aggregating to 4% approximately of the issued, subscribed and paid up share capital of GCL.
7] The first respondent is a closely held family company which Comp.Appeal No.24-10 was incorporated as a private limited company under the Companies Act, 1956. The first respondent is a family run enterprise whose continued existence has been based on mutual trust and faith amongst the Kavasmaneck / Gharda families. The second respondent is the first appellant's brother. He is the Chairman and Managing Director of first respondent company.
Respondent No.3 is second respondent's wife and a Director of first respondent. The third respondent however, does not discharge any functions as Director of the first respondent and is appointed as a Director only because she is second respondent's wife. The second/ third respondents between themselves hold 38,651 equity shares of first respondent company aggregating to 60% approximately of the issued, subscribed and paid up share capital.
The remaining 4592 shares aggregating to 7% approximately of the issued, subscribed and paid up capital of the first respondent company are held by the friends, nominees and employees of Dr.Gharda (second respondent) and all of whom owe allegiance to him. Thus 43,243 equity shares aggregating to 67% approximately of the issued, subscribed and paid up share capital of the first respondent is owned and / or otherwise controlled by Dr.Gharda Comp.Appeal No.24-10 who constitutes the preponderant majority group in the first respondent.
8] The respondent No.4 is appointed as an Additional Director by the Board of Directors on 29th July 2009 and has now been appointed as a full time Director of the first respondent. The 5th respondent is the wife of one late Hoshang Patel who was the classmate of 2nd respondent and who was also the Vice Chairman and Director of the first respondent. The 6th respondent is a Chartered Accountant and is on the board of Directors since last more than two years.
9] The appellants stated that the family history is relevant because one late Bai Ruttonbai Gharda had three children i.e. late Mrs.Coomi Warden, Mrs.Jer Kavasmaneck, the first appellant and Dr.Gharda the second respondent. Husband of late Coomi and the first appellant so also their families have been referred to along with wife of Dr.Gharda. It is stated that Dr.Gharda had no children whereas the first appellant and her late husband (Rutton Kavasmaneck) had one son- the second appellant, Mrs.Maharookh Comp.Appeal No.24-10 Murad Oomrigar and Dr. Percy R. Kavasmaneck. Thus the first appellant is sister of second respondent. Whilst the second appellant is nephew of respondent Nos. 2 and 3. It is then alleged that in or around early 1960's the second respondent had returned from U.S.A., after securing a masters degree and a doctorate in chemical engineering, he was desirous of setting up a manufacturing unit but was unable to do so for lack of funds. The second respondent requested his late mother Mrs.Bai Ratanbai Gharda, his later sister Mrs.Coomi Warden and the late Mr.Rutton Kavasmaneck to invest their funds and join him in partnership. The late Mr.Rutton Kavasmaneck made an investment of practically all his savings as mentioned in the petition.
10] In or about April 1962, the second respondent, late Grand mother of second appellant (Bai Ratanbai Gharda), husband of first appellant and father of second appellant (Rutton Kavasmaneck) and late Mrs.Coomi Warden (maternal aunt of second appellant) entered into a partnership dated 28th April 1962 called M/s.Gharda Chemical Industries. The deed of partnership dated 28th April 1962 shows that the total capital contribution from the partners was Rs.2,50,000/- out Comp.Appeal No.24-10 of which Rs.1,00,000 (40%) was contributed by the late Rutton Kavasmaneck, Rs.50,000/- (20%) by the late Bai Ratanbai Gharda and Rs.50,000/- (20%) by late Mrs.Coomi Warden. The only financial contribution of the second respondent was Rs.50,000/- i.e. 20% of the total contribution. As far as the appellants are aware, the second respondent was not even in a position to fulfill his financial contribution. In fact the second respondent was unable even to raise the "pennies" initially. Against his capital contribution of 20%, the second respondent was to receive 40% of the profits and/or losses while the remaining 60% was divided amongst the others with the late Rutton Kavasmaneck having 30% share of the profits and/ or losses. Under the said deed of partnership, whilst second respondent was responsible for the manufacturing activity and matters connected therewith, the selling arrangements and prices were to be decided by the second respondent in consultation with the other partners. The said partnership also provided that the name and goodwill of the business would belong to the partners in proportion to their interest and the heirs of any partner of the said firm had option to continue as a partner along with the surviving partner.
Comp.Appeal No.24-10 11] It is further stated by the appellants that on the death of late Bai Ratanbai Gharda on 30th November 1965, a fresh deed of partnership was executed and entered into on 14th January 1966.
The partnership firm of M/s.Gharda Chemical Industries was continued by the remaining three partners. The said deed of partnership dated 14th January 1966 shows that the capital contribution provided for the partners was Rs.2,00,000/- out of which Rs.1,00,000/- (50%) was contributed by the second appellant's late father. The profit sharing ratio was changed to the extent that the second respondent now had a 45% share while the second appellant's late father had 35% share and the late Mrs.Coomi Warden had a 20% share. The said deed of partnership had identical clauses as the Deed of Partnership of 28th April 1962 i.e. the name and goodwill of the partnership business would belong to the partners in proportion to their interest in the partnership and that the heirs of any deceased partner would have option to continue as a partner along with the surviving partners.
12] Sometime in 1965/ 1966 the firm of M/s.Gharda Chemical Comp.Appeal No.24-10 Industries underwent a deep financial crisis. The entire working capital limit was fully used up in manufacturing a product that failed to have the expected market. The firm had no funds to manufacture any other products. The banks refused to lend monies until old stocks were sold. The Appellants understand that at such time the second respondent approached one Dr.Damascene Rebello whose contact was built/ developed at the University Department of Chemical Technology (UDCT).
ig The said Dr.Rebello was also instrumental in introducing the second respondent to Godrej Soaps Limited through which the second respondent was able to get a contract for supply of a vital product known as G-11 used by Godrej Soaps Limited for their prestigious product Cinthol soaps. The appellants understand that the second respondent requested for financial support/ assistance of an amount of Rs.50,000/- from Dr.Rebello. The second respondent persuaded Dr.Rebello to break his family investment and guaranteed far better returns. To the end and intent, the second respondent, inter alia, agreed to grant to the Rebello family an option not to accept prepayment of the loan but to invest maximum of Rs.20,000/- in a limited company that would be formed on conversion of the said firm of M/s.Gharda Chemicals Comp.Appeal No.24-10 Industries.
13] With the profits of the firm of M/s.Gharda Chemicals Industries subsequently escalating, the second respondent reneged from his commitment viz - a - viz the Rebello family. Appellants were informed that the second respondent attended Dr.Rebello's residence without any prior intimation and left a cheque for an amount of Rs.51,500/- on a sofa. Dr.Rebello however refused to accept the said cheque as he desired to take a share in the limited company as per the agreement with Dr.Gharda. The Rebello family who had a right to acquire 200 shares at a value of Rs.100/- per share in the first respondent was subsequently, after persuasion, allotted only 85 shares at a premium of Rs.136/- per share. It is significant that if Dr.Rebello had been issued 200 shares as per the Agreement, Rebello family's shareholding would have aggregated to 6080 shares.
14] The first respondent was formed and incorporated on or about 7th March 1967 with the principal object of taking over the partnership firm of M/s.Gharda Chemicals Industries as a going Comp.Appeal No.24-10 concern. The subscriber members of the first respondent as per the memorandum and Articles of Association of the first respondent were the late Mr.Rutton Kavasmaneck and the second respondent who each subscribed to 5 shares of Rs.100/- each. Apart from the above Rs.1000 no capital contribution was made in cash. However, the partners of the firm were issued fully paid up shares amounting to Rs.2,00,000/-. Dr.Gharda was allotted 1100 shares, the late R.M.Kavasmaneck was ig allotted 600 shares and the late Mrs.Warden was allotted 300 shares.
15] In the aforesaid partnership firm, the late Rutton Kavasmaneck was the major financial partner. However, the second respondent allotted to himself 55% shares (as against his share of 25% in the capital of the firm and 45% in profits of the firm) to the late Rutton Kavasmaneck 30% shares (as against his share of 50% in the capital of the firm and 35% in the profits of the firm) and to one Coomi Warden 15% (as against her share of 25% in the capital of the firm and 20% in the profits of the firm). The first respondent came to be incorporated with a view to obtain the benefit of corporate personality and the advantage of a limited liability. The Comp.Appeal No.24-10 first directors of the respondent No.1 were (a) Dr.K.H.Gharda (b) Late Mr.Rutton Kavasmaneck and the Articles of Association expressly provide that neither were subject to retirement by rotation.
Moreover the late R.M.Kavasmaneck was the Chairman and accordingly had a casting vote. Some of the relevant clauses of the Articles of Association of the first respondent were as follows:-
"3. The company is a private company and accordingly;
(a) The right to transfer shares of the company is restricted in the manner hereinafter appearing;
(b) ...... ........
"118. The first Directors of the Company are:-
(a) Shri K.H.Gharda
(b) Shri R.M.Kavasmaneck Who are also the subscribers of the Memorandum of Association of the company; and they shall not be subject to retirement by rotation."
"147. Save as otherwise expressly provided in the Act, questions arising at any time in the meeting of the Board shall be decided by a majority of votes. In case of an equity of votes the Chairman of the Board shall have a second or casting vote."
16] It is therefore, alleged that the company is a private limited Comp.Appeal No.24-10 company and accordingly the provisions of Companies Act and the Articles of Association are hence referred to. It is then alleged that despite formation of the company all business of partnership being taken over by the said GCL, the character and business was always treated as if it is partnership between Kavasmaneck family and second respondent's family being the dominant partners having substantial stake in GCL. To that end and intent it was also a family understanding between dominant partners that their inter se proportionate shareholding in the first respondent company should not be altered without consent of the other groups and should any group decide to sell their shares other groups should be given the first right of refusal. This family understanding was also recorded in Articles and Memorandum of Association and Article 57 states thus:-
"57. Save as aforesaid the following provisions shall apply to the transfer of shares -
(a) A member of the company may transfer a share to his lineal descendent, but save as aforesaid no share shall be transferred to a person who is not a member of the company so long as any member is willing to purchase the same at the fair value as hereinafter provided Comp.Appeal No.24-10
(b) The member proposing to transfer any shares (hereinafter called the proposing transferor) shall give notice in writing (hereinafter called a transfer notice) to the Company that he desires to transfer the same;
(c) Within the period of seven days from the receipt of a transfer notice as aforesaid the Company shall offer to each of the existing members of the company respectively such number of the shares included in the transfer notice as a pro rata or as nearly as may be to the holding of each member respectively on the footing that if he desires to purchase any or all of such members of the said shares at the fair value he shall within fifteen days of the offer be entitled to apply for the purchase and transfer of the same and the company shall be bound, upon payment to the transferor of the fair value of such shares, to transfer the shares of member applying;
"(d) In case any member or members shall not have applied for the purchase and transfer of any or all of the shares to which he is entitled, the company shall within seven days of the date at which the offer closed, offer the untaken shares to such of the members as have applied for the purchase and transfer of all the shares to which they were entitled by the terms of the original offer in proportion as the holding of each of such members bears to the total number of shares held by them and they shall be entitled within fifteen days of the offer to apply for the purchase and transfer of a pro rata number of the said untaken shares and the company shall be bound, upon payment to the transfer of the fair value of such shares, to transfer the shares to the member applying;
(e) The promising transferor shall be bound to execute a transfer in respect of any shares so sold and in default thereof be deemed to have executed such a transfer. The company shall thereupon cause the names Comp.Appeal No.24-10 of the members who have purchased the shares to be entered in the Register as the holders of such shares and thereafter the validity of the proceedings shall not be questioned by any person;
(f) In case no member shall apply for any of the shares included in the transfer notice or in case any are untaken after compliance with the foregoing provisions of this Article the intending transferor shall have the right (which right shall endure for the period of one year from the date of transfer notice) to sell and dispose of his shares to any person and at any price and to apply for registration of the transfer of the same and the company shall be bound to give effect to the transfer of such shares accordingly.
(g) For the purpose of this clause the fair value of the share shall be such sum, if any, as the auditors for the time being of the Company shall certify as the fair value thereof provided that it expressly declared that the fair value shall be (1) the amount of capital paid up thereon plus (2) a sum bearing the same proportion to the value as appearing in the company's last balance sheet of any reserve fund or other fund of the company as the capital paid up on all the shares of the company for the time being issued plus or minus as the case may be, (3) a sum bearing the same proportion to the value as appearing in the profit and loss account consisting of or representing undivided profits or losses as the capital paid up on such share bears to the total capital paid up on all the shares of the company for the time being issued."
17] It was therefore stated that in 1968-69 and 1977-80 a small number of shares were allotted to employees and others who were Comp.Appeal No.24-10 essentially friends and family members. Apart from such allotment all subsequent increases in the paid up capital have been by fully paid up bonus shares. By such bonus share issues the initial capital of 2000 equity shares has arisen to 64,514 shares.
18] It is further stated that with the growth of the first respondent, the second respondent adopted an attitude which was oppressive to the late Ruttonig Kavasmaneck and the members of the Kavasmaneck family so as to compel the Kavasmaneck family to exit the first respondent. In fact the late Rutton Kavasmaneck was repeatedly constrained to observe that he had been wrongfully prevented from having any stake in the management and affairs of the first respondent and that he was not permitted to have access to relevant information or documents with regard to the first respondent to enable him to have a say in the management and affairs thereof to enable him to take decisions in respect of matters laid before the Directors for their consideration. Several acts of oppression of the Kavasmaneck family by the second respondent have been recorded in the draft of the minutes of the Board of Directors meeting dated 16th December 1974. Further, it would be Comp.Appeal No.24-10 evident from a letter dated 27th June 1975 addressed by the late Rutton Kavasmaneck to the second respondent. The said letter and the statement annexed thereto would show the manner in which the late Rutton Kavasmaneck was sought to be harrassed and humiliated in several possible ways including financially. In fact, during the life time of the late Rutton Kavasmaneck, the second respondent attempted to dilute away the shareholding and stake of the Kavasmaneck family in the first respondent by any and every devious stratagem. Not succeeding in forcing the late Rutton Kavasmaneck to exit the first respondent, the second respondent even sought to requisition an Extra Ordinary General Meeting (EOGM) to appoint additional Directors on the board of first respondent. He along with his nominees first issued a requisition notice dated 20th June 1975 and then as one of the requisitionist, he issued a Notice dated 6th August 1975 convening an EOGM on 4th September 1975. This being the last straw, the late Ratton Kavasmaneck became constrained to institute a suit in the City Civil Court being Short Cause Suit No.6360 of 1975, inter alia, against the respondent Nos. 1 to 3. In the said suit, the late Rutton Kavasmaneck sought a declaration that the purported Notice dated Comp.Appeal No.24-10 6th August 1975 was void, illegal and of no effect and that the first respondent and the second and third respondents were not entitled to hold the said EOGM of the first respondent or to pass any resolution as mentioned in the said notice and for injunction, ad-
interim reliefs etc. On the institution of the above suit, an application for ad-interim reliefs was made and an ad-interim order was passed on 3rd September 1975. On the passing of the said ad-interim order, a close relative, both of the second respondent and Kavasmaneck family who was also a Solicitor and shareholder of the first respondent company, intervened in the matter and on the second respondent agreeing not to proceed further to pass any resolution at the proposed EOGM so also agreeing to ensure the required financial reliefs to the late Rutton Kavasmaneck, the said suit was not proceeded further.
19] As a part of the settlement of the aforesaid City Civil Court suit, one of the assurances given by the second respondent to the late Rutton Kavasmaneck was that a new chemical plant would be set up which would be fully backed by the first respondent in terms of technical know how and infrastructure and that the plant would be Comp.Appeal No.24-10 under the total control and management of the Kavasmaneck family.
The setting up of the new plant would take care of and solve the financial needs of the Kavasmaneck family. Pursuant to the settlement, the Kavasmaneck family incorporated and registered a private limited company called Kavasmaneck Chemicals Pvt. Ltd.
(KCPL). In the spirit of settlement, the second respondent was made a permanent Director of KCPL and also Chairman.
20] For the purpose of raising required finance for the project of KCPL at the 2nd respondent's instance, the members of the Kavasmaneck family had handed over to the second respondent some blank signed share transfer forms in 1976 and a few more blank transfer forms in or about May 1977. This was done with the intention of enabling the second respondent to realise a good price and to sell only the bare minimum numbers of shares as were necessary for the new project. From the records which subsequently became available, it has transpired that the second respondent had transferred either to himself or his nominees an aggregate 685 shares by misusing the said blank signed transfer forms viz., between the period 1976 - 1977 about 480 shares were Comp.Appeal No.24-10 transferred in the year 1976 for the purpose of the initial capital of KCPL and 205 shares in July 1977 for the further capital required by KCPL in view of the change in the project by the second respondent.
21] The records available further reflect that the appellants 180 shares (155 shares of second appellant and 25 shares of first appellant) were apparently transferred to the nominee of the 2nd respondent through five transfer forms. Except for the signatures of the appellants, there is nothing else in the hand writing of the appellants in the said forms. The said forms appear to have been subsequently filled up by one J.P.Somaiya, the then Company Secretary of the first respondent. The said transfer forms itself would show that they had been so dated as to fit in the larger scheme of the second respondent without the knowledge of the Kavasmaneck family. Two of the forms also have the date of the form corrected from another date. It appears that the said blank transfer forms were filled in after the transfer, inasmuch as, in the form pertaining to the transfer of 25 shares of the first appellant, the entry in the form shows the entry number in the register of transfers Comp.Appeal No.24-10 as No.5 and dated 4th August 1977 though in the case of transfer of the 2nd appellant's 155 shares, all the entries in the forms are shown as entered in the register of transfers as No.6 and dated 30th July 1977. An entry purportedly earlier in point of time has a subsequent number than the purported subsequent entry.
22] After setting out the details of the transfer in paras 6.17 to 6.20, it is alleged that the appellants were wrongfully and illegally deprived of their bonus shares as subsequently discovered. It is also alleged that after demise of Rutton Kavasmaneck on 6th February 1977, instead of any member of the said family being taken on board of directors of GCL, Mrs.Gharda, respondent No.4 was coopted as director. It is alleged that second respondent had hatred towards the late Rutton Kavasmaneck. It is stated that after the death of Rutton Kavasmaneck, the Kavasmaneck family decided to set up its own chemical plant without assistance of second respondent and independently applied for loan and prepared Project Reports. However, the second respondent upon coming to know all these developments, devised a strategy to ruin the family by persuading them that they should trust him and he would render all Comp.Appeal No.24-10 assistance for setting up chemical plant and that too with the backing up of GCL. After setting out as to how the plant was set up to manufacture H-Acid by first respondent, there is a narration subsequently about obtaining of finance, recruitment of employees and other benefits. It is alleged that the project was changed mid-
way. That project with its details (KCFL) is then referred to. It is stated that this project suffered losses and, therefore, there were certain demands made or else the second respondent threatened to withdraw the support to KCPL. He resigned as Director and dumped records and books of KCPL at the second appellant's residence. There are allegations of syphoning of funds and certain dealings with Canara Bank. There is reference to the report of Consultants which was submitted to the Bank and, thereafter, it is stated that despite all odds Kavasmaneck refused to succumb to any pressures to reduce or dilute their shareholdings in GCL.
However, second respondent devised strategies to dilute their shareholdings and acted malafide. These are the allegations then made in the company petition.
23] It is further alleged that as a result of second respondent's Comp.Appeal No.24-10 calculated designs as aforesaid, the Kavasmaneck family's capital was totally wiped out and they were faced with losses to the tune of nearly Rs.2 Crores. They had to face litigation on all fronts including from Canara Bank, suppliers, Creditors etc. Several winding up petitions were instituted against KCPL. As a result the Kavasmaneck family was kept totally busy in efforts to salvage themselves from the losses.
24] It is further stated that even after the formation of the company, the business was continued as a glorified partnership essentially of the family. As the business had been started and taken over/ continued on partnership principles and on the basis of funds got in by the family, the family members / shareholders shares in the business and profits of the company by substantial amounts ranging from 20% to 45% of the net profits of the company being distributed to the family members/ partners/ shareholders as and by way of dividend as only Dr.Gharda received remuneration/ commission. Such distribution of profits by way of dividend was the only manner in which the other partners who had contributed funds could receive benefits/ returns. To that intent, profits were further Comp.Appeal No.24-10 distributed to the partners/ shareholders by way of bonus issues of capital by the company in the ratio mentioned in petition.
25] During 1982 to 1987 the first respondent however continued to duly distribute profits/ benefits to the partners/ shareholders in accordance with partnership principles. Except for 1982 and 1983 when the first respondent made only marginal profits, the first respondent distributed substantial proportions of its net profits ranging from 7% to 30% to the partners/ shareholders. In fact, in 1986 and 1987 the first respondent declared dividends amounting to 27.91 % and 29.76% of its net profits. Moreover, profits/ benefits were further distributed to the partners in accordance with partnership principles by the first respondent making a bonus issue of shares in 1986 on 1:1 basis. During these years, notwithstanding the distribution of profits as above, the reserves of the first respondent increased from Rs.20 lakhs in 1967 to Rs.348 lakhs in 1987. On 17th August 1988 the first respondent became a deemed public company under the provisions of section 43A of the Companies Act.
Comp.Appeal No.24-10 26] From the year ended 30th June 1988 onwards, Dr.Gharda with a view to squeezing out the Kavasmaneck family and compelling them to sell their shares in the first respondent company, departed from the earlier understanding/ practice of distributing profits to the partners/ shareholders through dividends and bonus shares and deliberately commenced a policy of wrongfully withholding dividends/ distribution of profits. The accretions to reserves raised the fair value of the shares and commensurately increased the wealth tax payable thereon. Consequently in most years the dividend declared was insufficient to even meet the income tax and wealth tax payable in respect of the said shares. For the earlier two years (i.e. 1986 and 1987), the dividend declared by the company was 27.91% and 29.76% of net profit. In fact the average mean of the dividend declared in the last preceding 14 years (even when for three years no dividend was declared) was 24.69% of the net profits.
27] However, for the year ended 30th June 1988, although the net profits increased phenomenally from Rs.43.35 lakhs in 1987 to Rs.
756 lakhs in 1988 i.e. an increase of 1644%, the dividend declared Comp.Appeal No.24-10 was reduced from 29.76% of net profits in 1987 to 2.13% of the net profits in 1988 i.e. the dividend sharply decreased by 92.85%. At the same time the reserves increased from Rs.348 lakhs in 1987 to Rs.1088 lakhs in 1988 resulting in a commensurate increase in the book value of the first respondent's shares from Rs.640 to Rs.1787 per share and the wealth tax liability in respect thereof. Similarly for the year ended 1989, the net profit increased from Rs.7.56 Crores in 1988 to Rs.16.93 Crores.
ig The percentage of net profits distributed by way of dividend was only 1.14%. An amount of Rs.16.73 Crores was transferred to reserves and the book value of the shares consequently increased from Rs.1787 to Rs.4382 per share. This resulted in a steep increase in the wealth tax liability and the dividend received by the appellants was not even sufficient to meet the wealth tax liability on the shares. The amount distributed by way of dividend to all the partners/ shareholders was Rs.19.35 lakhs. As against that first respondent invested Rs.634 lakhs on units of UTI, received Rs.79.72 lakhs as and by way of donation. In fact in some years the amount paid by the first respondent/ Dr.Gharda by way of donation has exceeded the amount distributed/ paid to the partners/ shareholders by way of dividends. Between the period 1st April 1988 Comp.Appeal No.24-10 and 31st March 1992, the wealth tax payable by appellant No.2 alone for his shareholding in the 1st respondent aggregated to Rs.
13,89,376/-. However, the dividend received by appellant No.2 in respect of the said shareholding was only Rs.4,34,000/- for the same period.
28] During the period 1989-90 whilst commencing the unfair dividend squeeze policy, Dr.Gharda and the first respondent despite being fully aware that the appellants and their family members were the only heirs of the late R.M.Kavasmaneck, wrongfully delayed transmitting the shares on various pretexts. At the same time Dr.Gharda convened an Extra Ordinary General Meeting and proposed drastic changes to Article 57 which would destroy the partners/ shareholders existing rights of preemption. The delay in transmitting the shares gained significance from the fact that the appellants along with their other family members held more than 25% of the 1st respondent's issued capital and could prevent all such oppressive amendments from being approved. It is also alleged that Dr.Gharda had stated at a meeting in September 1989 that the heirs should provide an indemnity/ undertaking. By his letter dated Comp.Appeal No.24-10 18th September 1989 the appellant No.2 forwarded the final Estate Duty Clearance Certificate and requested that the shares be transmitted to the concerned heirs and requested for a copy of the proposed indemnity/ undertaking. There was no reply for about three months. Accordingly, the Appellant No.2 addressed a reminder dated 21st December 1989. Since no reply was received or action taken, appellant No.2 addressed further reminder dated 6th January 1990. By a letter dated 16th January 1990, Company Secretary of the first respondent stated that action would be taken only on receipt of a request letter signed by all the heirs and this requirement was in addition to the indemnity. The letter also stated that first respondent was taking legal advise regarding the draft indemnity bond. Thereafter, by a letter dated 23rd January 1990, the appellant No.2 pointed out that almost all shareholders of the first respondent were relatives and that all persons entitled/ heirs had personally met Dr.Gharda in September 1989. Appellant No.2 pointed out that the draft indemnity bond was available and had in fact been accepted in the past. The appellant No.2 accordingly called on the first respondent not to intentionally waste time and delay registration of the transfer. It is further alleged that despite Comp.Appeal No.24-10 assurances, the first respondent did not deliver the draft indemnity.
The appellant No.2 recorded this deliberate delay by his letters dated 1st February 1990 and 3rd February 1990. By a letter dated 5th February 1990 the Company Secretary stated that indemnity bond would be forwarded "as soon as it is ready". Thereafter, appellant No.2 by his letter dated 5th February 1990 addressed to respondent No.2, inter alia pointed out that the delay in transmitting the shares, was to be viewed in the context of the scheduled EGM where respondent No.2 was proposing to make far reaching changes which would be destructive of the appellant's right of preemption. The appellant No.2 pointed out that Dr.Gharda was apparently seeking to oust the appellants although the first respondent was a closely held family concern. The appellant No.2 called on Dr.Gharda to defer the EGM and threatened action.
Thereafter, on 6th February 1990 Dr.Gharda and the Company Secretary of first respondent agreed to transmit the shares on receipt of the certificates and on the appellants agreeing to send an indemnity bond subsequently. By its letter dated 9th February 1990 the first respondent forwarded the said shares duly transmitted.
Comp.Appeal No.24-10 29] After narrating the events of 1989-90 leading up to filing of company petition No.77 of 1990 in this Court invoking section 397 and 398 of the Companies Act and referring to the reliefs claimed therein, what has been alleged is that after the petition was filed, the oppressive attempts of second respondent continued and each of these attempts are narrated from paras 6.4 onwards and under heading Item No.I etc. During the course of referring to attempts there is a detailed reference to the letters addressed from time to time.
30] It is stated that on 2nd April 2001, the first respondent issued a notice convening an Extra Ordinary General Meeting on 5th May 2001 for passing a special resolution for amendment of the Articles of Association for incorporating additional clause "d" in Article 3 viz., "no invitation or acceptance of deposits shall be made to/ from other members/ directors or their relatives." This was stated to be done in view of the Companies (Amendment) Act, 2000.
31] On 5th May 2001, the said Extra Ordinary General Meeting was held. The appellants opposed the proposed resolution. The Comp.Appeal No.24-10 proposed resolution for amendment of the Articles of Association was not passed. The appellants amongst the other shareholders voted against the said resolution. After this EOGM, one Mr.Udayan Maroo, the Company Secretary and Financial Director of first respondent as well as one Mr.C.C.Dayal (Internal Auditor of the first respondent) in the presence of Dr.Rebello informed the 2nd Appellant that since the resolution was defeated, the first respondent was a full fledged public company and Article 57 was no longer applicable.
The second appellant did not agree with the aforesaid contention and pointed out that the first respondent continued to remain a private company and Article 57 continued to govern the rights between the parties.
32] Whilst on the one hand the first respondent's officers informed the second appellant that Article 57 was no longer applicable, on 17th May 2001 and 28th May 2001 the first respondent circulated two transfer notices under Article 57 of the Articles of Association. The appellants who by that time were already under a tremendous financial strain, were unable to accept the said shares. Besides, having already informed the second appellant that in the opinion of Comp.Appeal No.24-10 first respondent, Article 57 was no longer applicable, the first respondent circulated two Transfer Notices under Article 57. This came as a surprise to the appellants. Accordingly, the second appellant addressed a letter dated 6th June 2001 to the first respondent stating that he failed to understand how the company continued to circulate the transfer notices under Article 57.
33] Whilst these events transpired, the second respondent's unfairly prejudicial stratagems continued to be unleashed from time to time. The objective of the second respondent is to squeeze out the appellants in any manner possible so as to force and/ or compel the minority shareholders to sell their shares to the 2nd respondent at a very negligible value and to oust them from the first respondent.
The second respondent being at the helm of the control and management of the affairs of the first respondent is only ensuring that he gains and enjoys the benefits which other shareholders cannot and which he would receive having regard to his status and position as the Managing Director of the first respondent through excessive remuneration, increased commission and grant of huge donations to Trusts/ entities owned/ controlled by the second Comp.Appeal No.24-10 respondent and his wife. For the year ended March 2004, the second respondent also siphoned a huge amount of approximately Rs.4 Crores in the guise of alleged compensation for alternative accommodation. Further it is alleged that in or around August 2004, the second appellant received a notice dated 27th July 2004 by which the first respondent convened the 38th Annual General Meeting of the first respondent on 4th September 2004. By the said notice it was inter alia, proposed to empower the first respondent to give donation of an amount aggregating to Rs.5 Crores during the financial year 2004-05 in favour of Trusts/ Foundations owned and/ or controlled by the second respondent. The proposed resolution was sought to be passed as an "ordinary" resolution. With the second respondent owning and or controlling more than 65% of the issued subscribed and paid up share capital of the first respondent and controlling the first respondent, the aforesaid was yet another pre-planned strategy to enrich the second respondent at the cost of and to the detriment of the first respondent and appellants.