SANGRAMSINH P. GAEKWAD AND ORS. v. SHANTADEVI P. GAEKWAD (I) THR. LRS. AND ORS.

The Judgment of the Court was delivered by

S.B. SINHA, J. These appeals are directed against a judgment and H

638 SUPREME COURT REPORTS (2005] I S.C.R. ~ _, A order dated 9.8.2000 passed by a Division Bench of the High Court of Gujarat at Ahmedabad in 0.1. Appeal Nos. 6, 7 and 8of1995 whereby and whereunder the judgment and order dated 17 .12.1994 passed by a learned Single Judge of the said Court dismissing Company Petition No. 51 of 1991 filed by the First Respondent herein, was set aside.

B BACKGROUND FACTS : Sir Pratapsinghrao Gaekwad was the Ruler of Baroda. Maharani Shantadevi Gaekwad was his wife. They had eight children. For certain reasons with which we are not concerned, the estate of Gaekwad came into the hands of their elder son, Fatesinghrao P. Gaekwad (FRG) even during the life time " c of Sir Pratap Singh. FRG floated several companies, three of which are Baroda Rayon Corporation Ltd. (BRC), Gaekwad Investment Corporation Company Ltd. (GIC) and Alaukik Trading & Investment Corporation Pvt. Ltd. (Alaukik). BRC came into existence in 1958. At the outset, it was being run under Managing Agency System which was abolished in or about 1968 and later on the same was being managed by the Board of Directors with the assistance of professional executives. Appellant No. I herein, the youngest son of Pratapsinghrao Gaekwad, joined the said company in 1968. He was • the Director of Managing Agents till 31.12.1969 whereafter he became the Additional Director with effect from I st January, 1970. He in the same year l,.

became Joint Managing Director. Jn April 1976, he became the Managing E Director of BRC. He was reappointed as Managing Director for two periods of five years each with effect from 19th February, 1980 arid 19th February,

1985. FRG passed away on !st September, 1988, whereafter he was appointed as Chairman and Managing Director on 23.9.1988.

GIC was a small investment company. Its equity capital consisted of F 425 shares of Rs. I00 each. The said shares were mainly held by the family members. A large chunk of shares was held by Jaisingh Ghorpade Trust of which FRG was a trustee. The beneficiaries of this Trust are said to be >'" outsiders. Some shares of GIC were held by outsiders also. The share holding pattern of the Company was as under :

G Sr. Name No. of Shares No. I. Shrimant Fatesinghrao Gaekwad 301 "'

2Copy pinpoint2. H.H. Maharani Shantadevi Gaekwad 7

3Copy pinpoint3. H.H. Maharani Padmavatidevi Gaekwad 20 H

S.P.GAEKWADv.SHANTADEVIP.GAEKWAD [SINHA, J.) 639 ~).

4Copy pinpoint4. Prince Ranjitsingh P. Gaekwad 10 A

5Copy pinpoint5. Shrimant Sangramsinh P. Gaekwad

6Copy pinpoint6. Princess Shubhanginidevi Gaekwad 5

7Copy pinpoint7. H.H. Mrunalinidevi Puar 10

8Copy pinpoint8. Shrimant Lalitadevi Kirdatt 5 B

9Copy pinpoint9. Shrimant Shivrajkurnar

> IO. H.H. Padmavatidevi Gaekwar & 4 -. H.H. Maharani Shantadevi Gaekwar

11Copy pinpoint11. Shrimant Pramila Raje of Jasdan 4 c

12Copy pinpoint12. Shrimant Asharaje Gaekwad 5

13Copy pinpoint13. Shrimant Ajaysinh Murarrao Ghorpade

14Copy pinpoint14. Shrimant Vasundhara Raje Murarrao Ghorpade

15Copy pinpoint15. Shrimant Ashokraje Gaekwad D

16Copy pinpoint16. Shrimant Vimala Raje Gaekwad "'

17Copy pinpoint17. Shrimant Devayanidevi Gaekwad -+ 18. Shrimant Ajitsinh Gaekwad

19. Shri Jaysinghrao M. Ghorpade & 5 E H.H. Maharani Padmavatidevi Gaekwad

20. Shrimant Dilipsinh G. Desai & 5 Smt. Kusumben D. Desai

21. Smt. Kusumban D. Desai & 5 Shri Dilipsinh G.Desai F ... 22. Capt. V.S. Hazare 10 ,;... . 23. Smt. Pramilabai Hazare IO

24. Shri Malhari N. Khade

25. Shri Rameshchandra V. Dhaibar 10 G Total equity shares 425

'"' Alaukik was a subsidiary of GIC. Respondent No. 12, Mrs. Mrunalini Devi Puar was its Managing Director.

Allegedly, GIC suffered a loss during the financial years ending 3 I st H

640 SUPREME COURT REPORTS [2005] I S.C.R.

A March, 1987 and 3 Jst March, 1988 as a result whereof substantial parts of the equity and reserves were wiped out. It could not c;ven pay off the loans and credits. It had no funds to subscribe for the rights issue made in 1989 by BRC. Its share holding in BRC was likely to fall with which its forged fortunes were closely linked as the dividend from the shares of BRC was the major source of income of the company. GIC came into financial trouble when BRC did not declare dividend in 1986-87. The value of BRC shares also declined and, thus, it became difficult to avail of an overdraft facility from the Banks. It was then decided to raise funds from the existing mem hers. The Board of Directors ofGIC in a meeting held on 10.11.1987, decided to broad-base the company, whereafter an extraordinary general meeting was convened on 17.12.1987. In the said EGM, a decision was taken to increase the capital by issuing 25000 equity shares of Rs. 100 each. The matter was again placed in a Board Meeting of GIC on 8th January, 1988. In the said Board Meeting presided over by Appellant No. I and attended by Mr. P.U. Rana and Mr. P.H. Chinoy, a resolution was passed that 15000 equity shares of Rs. 100 each be issued at par to the members of the company. The said resolution reads as under :

"Resolved that out of 25000 equity shares of Rs. I 00 each, 15000 equity shares of Rs. I 00 covering Rs. 15,00,000 be issued at par to the members of the Company at present and the balance as and when required. E Further Resolved that the Management Committee of the Company be and is hereby authorized to issue equity shares to members in such proportion as it deems fit.

Further Resolved that the Management Committee be and is hereby authorized to do all such acts, deeds and things necessary for the .- purpose."

Pursuant to or in furtherance of the said resolution, the Company Secretary, Mr. M.N. Khade issued a circular letter dated 12.2.1988 to all the existing shareholders requesting them to subscribe for the equity shares at par wherefor a time limit of three weeks was fixed. It was stated that if no reply is received by I 0th March, 1988 it would be presumed that the concerned shareholder was not interest'!d in the offer. The said circular letter reads as under : "12th February, 1988 H

S.P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J.] 641

1·> Shrimant Fatehsinhrao Gaekwad Hoechest House, Nariman Point A Bombay 400 021 It has been decided to increase the equity capital of the Company by the issue of 15000 equity shares of Rs. 100 each at par, to the members of the Company. You are hereby requested to convey your acceptance for the number B

,. of shares for which you would like to subscribe, along with a cheque covering the full amount at the rate of Rs. I 00 per share, within three weeks from the date of receipt of this letter. If no reply is received - ... by 1Oth March, 1988 it will be presumed that you are not interested in the offer and the shares will be offered to the other members. c Thanking you, Yours faithfully, For Gaekwad Investment Corporation Pvt. Ltd. D "' (M.N. Khade) -1 SECRETARY" On or about 13th February, 1988, another meeting was convened which was chaired by FRG wherein the resolution passed in the meeting dated 8th E January, 1988 was confirmed. The Managing Committee, having regard to the fact that no offer was received from the existing shareholders, in its meeting dated 2 I st March, 1988 extended the time for the aforesaid offer. It was further decided that out of 15000 shares, 8000 shares be kept apart for the time being for FRG and the balance 7000 shares be kept apart for other ... existing members. Allegedly, on instructions of Appellant No. I herein, the F .... Company Secretary gave first option to the other family members to subscribe for shares according to their request and the remaining were put in the name of Appellant No. I and his family; pursuant whereto only two persons, Mrs. Puar asked for allotment of 500 shares and Mrs. Shubhanginidevi Gaekwad for 25 shares respondent and, thus, the remaining 64 75 shares were allotted G to Appellant No. I and family.

It is further alleged that FRG became disinterested in the 8000 shares allotted to him. The contention of the Appellants herein is that the balance 7500 shares were renunciated by FRG in his favour and in favour of his children in June, 1988 as the same remained unallotted as other members H

642 SUPREME COURT REPORTS [2005] I S.C.R. A specifically refused to take up any share. His sons and daughters applied for further 3000 shares through Appellant No. 1 as guardian and the same was allowed. The remaining 4500 shares, however, remained unallotted. The issue is said to have been closed on 10.12.1988.

Respondent No. 12, Mrs. Puar who was the Managing Director of B Alaukik in a meeting held on 12.10.1989 which was chaired by her issued to herself 1500 shares without allegedly issuing any notice to the existing shareholders and wherefor allegedly no payment was even made. It is contended that by reason of such overt act, the Respondent No. 12 herein, came in majority of Alaukik as a result thereof it would cease to be a subsidiary C company of GIC. GIC had 84% shares in Alaukik but by reason of the said allotment in favour of Respondent No. 12, its share holding therein was diluted to 32%. The account of the Company was also said to have been transferred to a current account.

On 1.9.1990, a Civil Suit being No. 675/90 was filed by GIC against D Alaukik questioning inter alia the allotment of 1500 equity shares of Rs. 100 each to the defendant No. 2 therein.

In the said suit, Mrs. Puar filed her written statement on 29.11.1990 wherein inter alia a stand was taken that 8000 shares kept apart for FRG devolved on Shantadevi as a Class I heir of FRG. She incidentally applied for E allotment of the said shares also on 29.11.1990. A contention was also raised in the said written statement that if the said shares are allotted, Respondent Nos. 1 and 12 would be holding the majority shares in GIC and Alaukik even if allotment of 1500 shares in Alaukik is held to be bad in law.

It is also not in dispute that lndreni Holding Pvt. Ltd. (Indreni) was a F wholly owned company of the Appellants herein. Allegedly, by way of tax planning, the Appellants herein decided to transfer 9415 shares in favour of the said company wherefor allegedly a letter was prepared by the Company Secretary on or about 15.11.1989 which reads as under :

"November 15, 1989 G To

All the Shareholders.

The Company has received intimation from existing shareholders H about their intention to sale some of their shares of Gaekwad

S.P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J.] 643

'l""J Investment Corporation the details of which are attached herewith. A Pursuant to the provision of the Articles, it is hereby brought to your notice about the sale of the shares by the existing shareholders. You are 'therefore requested to intimate to the Company about your interest in purchasing the share before 20th December, 1989. B Please note that in case if the company does not hear from you within stipulated period it will be construed that you are not interested 'j in purchasing...................................... of the same as board deem fit. _., Yours faithfully, For Gaekwad Investment Corporation Pvt. Ltd. c (M.N. Khade) SECRETARY" It, however, stands admitted that the said letter was not circulated. D The Appellants herein were allegedly under a belief that the said notice " had been circulated and as no response thereto was received, they transferred 9415 shares out of 9481 shares to Indreni.. Questioning the said transfer, three ·-+ suits came to be filed by different shareholders marked as Suit No. 305/90, 867/90 and 872 of90. Suit No. 305/90 was filed by Pramilaraje Khacchar on 28.11.1990 in the Rajkot Civil Court wherein inter alia following reliefs E were sought for :

"A. it be declared that the purported sales and transfers by the defendants Nos. 3 to 7 of the 9415 equity shares owned by them in the first defendant company in favour of the second defendant company F J are ultra vires their powers, illegal, null and void ab initio and that ... the said shares continue to be of the ownership of the respective defendants Nos. 3 to 7 as if no such sale or transfer was ever made.

B. a decree for permanent mandatory injunction be passed in favour o_f the plaintiff and against the first defendant directing it to offer and G transfer the said 9415 equity shares in the first defendant company to the plaintiff and other remaining members. ·...,;, C. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the defendant No. 2 restraining the second defendant from exercising or enjoying any voting or other rights in H

644 SUPREME COURT REPORTS [2005] I S.C.R.

A respect of the said 9415 equity shares in the first defendant company.

D. that a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the second defendant directing the second defendant to repay the first defendant company dividend, if any, paid to the second defendant with interest at 24 per cent per B annum.

E. any other relief that the Hon 'ble Court deems fit in the circumstances of the case be granted."

Suit No. 867 /90 was filed by Shubhangini Gaekwad in Baroda Civil c Court on 12.12.1990 praying for identical reliefs.

Suit No. 872of1990 was filed on 19.11.1990 by Ajit Singh Gaikwad, the Respondent No. 8 herein, wherein one additional relief was claimed which is in the following terms :

"it be decreed and first defendant be directed to offer and transfer D 9415 equity shares with distinctive numbers mentioned in para 18(a) to the plaintiff and other remaining members of the first defendant company in pursuance of the Articles of Association."

In Suit No. 305 of 1990, concededly an order of injunction was passed E on 28.11.1990, as prayed for by the plaintiffs, restraining Indreni from exer~ising or enjoying any voting or other rights in respect of the said 9415 equity shares in GIC.

A similar order of injunction was passed by Civil Judge, S.D. Vadodara in Suit No. 867 of 1990 in the suit filed by Mrs. Shubhanginidevi Gaekwad F on 12.12.1990.

In their replies filed in the suits, the Appellants herein inter a/ia contended that a Board Meeting was convened on 13.7.1990 for reconsidering the transfer of shares to Indreni. They also sought for legal opinion in view of the fact that the notice dated 15 .11.1989 was not circulated to the members. G The purported resolution passed in the said meeting reads as under : "Resolved that the transfer of 9415 equity shares in favour of Indreni Holdings Pvt. Ltd. approved by the Board on 30.3.90 be reconsidered and that the matter be referred to Transferors and Transferees.

H Resolved further that the legal opinion be sought in the matter of ('

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J.] 645 captioned transfer of 9415 equity shares of the company in favour of lndreni Holdings Pvt. Ltd."

The Respondents herein, however, contend that the said resolution was a fabricated one as no Board Meeting was held on the said date. On or about 20th July, 1990, the Appellant No, 1 issued a letter to the Board of Directors that if the transfer of shares was found to be irregular, he should be permitted to remove transfer notice as per articles. On 9.8.1990, allegedly, a Board meeting was held and the shares transferred to lndreni were rescinded. The Respondents contend that the said plea is by way of an afterthought inasmuch as dividend had been paid to lndreni and TDS on the amount of dividend was deposited in State Bank of India after 9.8.1990. C The said suits are still pending.

lndisp11tably, Respondent Nos. 1 and 12 herein took inspection of the Registers of Members and other documents on 10.12.1996 and the relevant extracts were taken and notarised. D . An Annual General Meeting was allegedly held on 20.12.1990 wherein except for appointment of auditors all other resolutions e.g. seeking appointment of Directors in favour ·of Appellant No. 1, his wife (Appellant No. 2) and his group were rejected. In the said meeting the share holdings said to have been acquired by Jndreni i.e. 9415 shares was not taken into account and the voting rights of the Appellants were kept confined to 66 shares. It is also not in dispute that prior to the said meeting, Appl'llant No. 1 lodged a First Information Report apprehending trouble in the said meeting.

Respondent No. 1 filed an application under Sections 397 and 398 before the Gujarat High Court on or about 4th March 1991 wherein she initially prayed for the following reliefs :

(A-i) Declaration that she is allottee of 8000 equity shares of respondent No. 6 company.

(A-ii) Direction to issue share certificates immediately to her of these G 8000 shares.

646 SUPREME COURT REPORTS [2005] I S.C.R.

A (C) Declare that she is sole heir of Late FRG and as such she is .. .... .

entitled to be in majority and control ofrespondent No. 6 company. (D) Declare respondent No. I, 2 (present Appellant No. I and 2) 9, IO and 11 (present Respondent No. 9,10,11) have ceased to be directors in respondent No. 6 company. B (E) Restrain by injunction respondent No. I, 2 (present Appellant No. I and 2) 9, JO and 11 (present Respondent No. 9, 10, 11) from acting as director, officer of respondent No. 6 company. ..f:. (F) Declare any act deed or thing done after A.G.M. of 20-12-1990 ~

(G) Declarations in regard to resolutions passed at the E.G.M. dated 14-1-1991.

(H) Appointment of receiver. D Pending Admission respondent No. I and 2 (present Appellant (I) No. I and 2) be directed to produce before this Hon'ble Court or "' receiver all documents, papers, etc. ... (J) Pending admissions interim injunction against respondent No. I, 2 (present Appellant No. I and 2) 9, I 0 and 11 (present Respondent E No. 9,10,11) from acting as directors or officers of the company. (K) Ad-interim reliefs in terms of para H, I and J above. However, the said reliefs were subsequently amended and the following additional reliefs were also prayed for : F "A-I That this Hon'ble Court be pleased to declare that all allotments of shares in Respondent No. 6 company made beyond the original .... paid up capital consisting of 425 equity shares as existing on 23rd ,. March 1988 are null and void and illegal and of no legal effect whatsoever and be pleased to set them aside;

G A-2. In the alternative to praye~.

A-I and in any event, this Hon'ble Court be pleased to declare that the allotments of 6475 equity shares to Respondent Nos. I to 5 and/ or to their nominees or to the members of their nominee or to the members of their family is subject to the simultaneous allotment of H 8000 equity shares to petitioner no. I. 500 equity shares to Smt.

S.P.GAEKWADv.SHANTADEVIP.GAEKWAD [SINHA, J.] 647 -+:. Mrunalinidevi Puar, 25 equity shares to Smt. Shubhangini Devi A Gaekwad and that the allotment of any further shares including the said 3000 shares to Respondent No. 4 and 5 is null and void and illegal and be pleased to set them aside.

A-3. In the evem that this Hon'ble Court holds that the allotment of 6475 shares to Respondent Nos. 1 to 5 a:id of 3000 shares to B Respondent Nos. 4 and 5 is valid, this Hon'ble Court be pleased to declare that the said 94 75 shares were transferred to Mis. lndrani ~ Holdings Pvt. Ltd. and shall be offered and transferred by Respondent -<I No. 6 to the shareholders holding pro rata on the basis of the original shareholding of 425 equity shares. c A-4. That this Hon'ble Court be pleased to direct Respondent No. 6 by an order of mandatory injunction to forthwith transmit 300 equity share registered in the name of late Fatehsinhrao Gaekwad as the then trustee of the Jaysinhrao Ghorpada Trust in favour of the present trustees. Petitioner No. 1 and Smt. Mrunalidevi Puar; D A-5. That this Hon'ble Court be pleased to transfer (1) Special Civil " Suit No. 675 of 1990 pending before the Court of the Civil Judge ~ (Senior Division) at Baroda, (ii) Special Civil Suit No. 305 of 1990 pending before the Court of the Civil Judge, Senior Division, at Rajkot (iii) Special Civil Suit No. 867 of 1990 - pending before the Court of E the Civil Judge (Senior Division) Baroda, at Baroda (iv) Special Civil Suit No. 872 of 1990 pending before the Court of the Civil Judge (Senior Division) at Baroda and (v) Special Civil Suit No. 63of1991 pending before the Court of the Civil Judge Senior Division (Surat) at Surat, to the file of this Hon'ble Court for hearing and disposal along with the present company petition; F _, A-6. In the alternative to prayer A-5, this Hon'ble Court be pleased "" to stay all interim or ad interim orders passed in the suits mentioned in prayer A-5 above;"

Sections 397-398 of the Companies Act were amended in 1990 in G terms whereof the jurisdiction of the High Court in that behalf vested in the Company Law Board. pursuant whereto the Respondent No. 12 herein filed a purported application under the said provisions before the Company Law Board, Special Bench, New Delhi which was marked as Company Petition No . .7 of 1992 on the ground of alleged continued mis-management of the H

• 648 SUPREME COURT REPORTS [2005] I S.C.R.

A Company and oppression. Allegedly, with a view to avoid simultaneous proceeding before two forums Respondent No. I hen:in sought permission before the Gujarat High Court to withdraw the proceedings being C.P. No. 50 of 1991 but the said request was opposed by the Appellants herein and was ultimately rejected by the High Court by an order dated 21.4.1992. An B appeal thereagainst was preferred before the Division Bench which was marked as 22 of 1992. The Appellants, on the other hand, sought stay of the proceedings before the Company Law Board whereupon an order was passed appointing Mr. Justice C:T. Dighe as an independent Chairman. Mr. Ranjitsinh Gaekwad, Respondent No. 4 herein was also appointed as a Director of GIC and the proceedings were stayed. Against the said order an appeal was preferred by Respondent No. 12 herein before a Division Bench of the Gujarat High Court which was marked as Appeal No. 20 of 1992 wherein the following interim order was passed :

"Rule Returnable on 19.1.1993. Ad-interim injunction restraining the company from raising its share capital, confirmed or undertake sale or purchase and/or mortgage fixed assets/investments of the Company by way of its shares in its holding or subsidiary company, start new businesses and decide the matters relating to policy decisions of material bearing, without placing the agenda to that effect before the Board of Directors and without holding a meeting presided over by an independent Chairman appointed by the Company Law Board by its order dated 28th September, 1992."

A question as regard the efficacy of simultaneous proceedings, one before the High Court and another before the Company Law Board arose for consideration and by an order 9.3 .1993 the Division Bench directed that in view of the nature of controversy it would be in the interest of the parties if the matter was finally heard and disposed of. The Appellants herein allegedly took a stand that if the said petition under Section 397 was heard on merits and disposed of expeditiously they would have no objection to the matter being heard either before the Company Law Board or before the learned Company Judge. Upon obtaining liberty from the Division Bench, the matter was mentioned before the learned Company Judge enquiring as to whether it can be disposed of expeditiously whereupon a schedule of hearing was worked out. Respondent Nos. 12 arid 13 herein were also added as parties in the said proceedings. The affidavits filed by the parties in all the proceedings were permitted to be brought on records and they were further permitted to file replies and/or rejoinders thereto.

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J.] 649 +i, The learned Company Judge disposed of the matters on the basis of said affidavits.

JUDGMENT OF THE SINGLE JUDGE:

NJ. Pandya, J. by reason of his judgment dated 17.12.1994 dismissed the said Company Petition opining : B (i) Allotment of 6475 shares having been admitted, no dispute could be ~ raised as regard thereto. Further allotment of 3000 shares was in terms of the resolution adopted by the Board Meeting which was preceded by the offer of shares to others. Such allotment was made in terms of the decision of the Managing Committee which was authorized therefor by the Board of Directors. c No time was specified for the Managing Committee to take appropriate decision in that regard. FRG renounced his shares and 3000 shares out of 8000 shares which were to be allotted to the appellants was also valid.

(ii) As regard the transfer of 9415 shares by the Appellants in favour of lndreni lifting the corporate veil thereof, the learned Judge held that the :. shareholders of lndreni being the Appellants only; any transfer made in its favour did not affect the company. Assuming such transfer was bad in law, + the voting rights in relation thereto continued to remain vested with the transferors. E (iii) In a petition under Sections 397 and 398 of the Companies Act, the Court is concerned with the question as to whether the control of the company slipped from one party to the other and as the Appellants, in any event, continued to form majority and, thus, any transfer made in favour of Indreni did not amount to oppression. F ~ (iv) Shifting of registered office from Baroda to Bombay although was ~ questionable, no relief was granted on the ground that the same would amount to putting the clock back and would invalidate the entire AGM and subsequent events which would not be in public interest and furthermore would result in unnecessary expenditure to the parties. G (v) Shantadevi did not have a right to 8000 shares by inheritance. An ,,,._ adhoc allotment of shares was merely an invitation which did not culminate in a right and, thus, no case could have been built thereupon.

(vi) On the question of mismanagement, it was opined "there was hardly H

650 SUPREME COURT REPORTS (2005] I S.C.R. A any mismanagement and only an apprehension that the change in control may amount to mismanagement" would not be acts of mismanagement. .. Three appeals were filed against the said judgment before the Division Bench of the said High Court which came to be allowed by reason of the impugned judgment. B JUDGMENT OF THE DIVISION BENCH

The Division Bench, on the other hand, held that the allotment of both · ~ 6475 and 3000 shares was invalid. As far as 6475 shares are concerned, it was held that the allotment was solely motivated by self-interest and the C ·minutes confirming such allotment were not acceptable. As far as 3000 shares are concerned, the Division Bench did not accept the authenticity of the letter by the Company Secretary of FRG renouncing the shares. Transfer of 9415 shares to Indreni was held to be invalid as no transfer notice was given to the company as required in terms of Article 8 of the Articles of Association. As D the transfer was duly recorded, to undo any such transfer, a resolution by the Board of Directors of Indreni would be required. In the absence of any such resolution the transfer being complete, only Indreni could have transferred . the shares back to the Appellants.

The Division Bench further held that there was a breach of fiduciary duty on the part of the Appellant No. 1. It opined that the relief that may be granted by the Courts is equitable though originating from a statutory provision. Since the actions of the respondents were designed to wrest control of the company by improper means, the minority shareholders could approach the courts for relief which may be granted by the courts.

F RELIEFS: ' The reliefs granted to the Respondents by the Division Bench are as .ir

under :

"I. It is hereby declared and ordered that all the allotments of shares from the additional share capital increased pursuant to the resolution of the Extra-ordinary General Meeting held on I 7. 12. 1987 and the resolution of the Board of Directors dated 8. 1. I988 and the decisions for such allotments, of the Managing Committee be treated as invalid and ineffective for all purposes and the shareholdings of all the members of the respondent No. 6 company hereby stand restored to

S.P.GAEKWADv.SHANTADEVIP.GAEKWAD [SINHA, J.) 651 the original 425 shares held by the members ignoring such subsequent allotments. The Register of members and other records of the company will stand rectified accordingly.

2. The Registered Office of the respondent No. 6 company is hereby declared to be continuing at the same place i.e. "lndumati Mahal" at Baroda, irrespective" of the resolution to shift it to Surat and the respondent Nos. I and 2 are directed to forthwith restore the entire record of the company to its Registered Office at Baroda.

3. All the Directors or purported Directors of the respondent No. 6 company stand removed forthwith. They will from today, not deal with the affairs of the company in any manner. C

4. An Extra-ordinary General Meeting of the shareholders of the company will be convened on 14th October, 2000 at 11.00 A.M. at the Registered Office of the Company at Baroda, for appointing Directors of the Company on the basis of the existing share-holding of 425 shares of the members of the company, in accordance with the D Article of Association.

5. The aforesaid meeting scheduled to be held on 14th October, 2000 will be conducted under the Chairmanship of the Additional Registrar of the High Court Shri V .B. Gandhi. All the share-holders of 425 shares including the petitioner No. I as the sole heir of the deceased E Shrimant Fathesinhrao P. Gaekwad in respect of the shares which stood in his name in the register of the members of the company at the time of his demise out of the said 425 shares in respect of which he had voting rights, will be entitled to vote by themselves or through their proxies at the said meeting for appointing the Directors of the p J Company. No outsider will be allowed to remain present at the meeting ... except the Additional Registrar who will Chair and conduct the meeting with his official assistants. The Additional Registrar will be assisted by a Section Officer of the High Court of his choice in the said work. G

6. All the share-holders who are parties to the present proceedings are hereby put to notice about the date of the said Extra-ordinary General Meeting to be held on 14.10.2000 at 11.00 AM at the Registered Office of the respondent No. 6 company at "lndumati Mahal", Baroda. The Additional Registrar will, however,· get published the notice of the meeting in one English daily and one Gujarati daily having H

652 SUPREME COURT REPORTS [2005] I S.C.R.

A circulation in the area. The Additional Registrar will also immediately issue individual notices of the said meeting to the share-holders. The Additional Registrar is authorized to seek assistance for conducting the meeting from all or any of the parties to these proceedings and/ or the officials of the company who shall be bound to assist him in that regard. No adjournment motion will be entertained at the said B meeting.

7. The Additional Registrar will on completion of the said meeting, prepare and sign the minutes of the meeting recording its outcome and declare in writing the names of persons who are appointed by the share-holders as the Directors of the respondent No. 6 company at the c said meeting, and thereupon such directors shall assume the management of the company on such declaration being made.

8. The remuneration of the Additional Registrar is fixed at Rs. 10,000 and the remuneration of the Section Officer will be Rs. 3,000 for the said purpose. The respondent No. 6 is permitted to withdraw the said D amount and also a further amount towards the expenses for publishing notice etc. totaling Rs. 30,000 from its Banks for the purpose of depositing it in the registry. The learned Counsel for the respondent No. 6 company states that the respondent No. 6 will deposit the amount of Rs. 30,000 in the Registry of this Court within 15 days. E

9. The learned Counsel for the respondent No. 6 Company has agreed to supply the names and present addresses of all the share-holders of the 425 shares of the Company, to the Additional Registrar on or before I9th August, 2000."

F SUBMISSIONS ON BEHALF OF THE APPELLANTS :

Submissions were made on behalf of the Appellants by Mr. Harish Salve, learned senior counsel and Mr. Kailash Jethmalani. In assailing the judgment of the Division Bench, the learned counsel at the outset would draw our attention to the fact that the concerned companies were family companies, having been floated by FRG and the affairs of several of them were being managed by his brothers and sisters. Appellant No. I had been put incharge of the BRC and GIC for a long time. It was urged that no dispute was ever raised as regard the decision of the Board of Directors to broad-base the company by floating 25000 shares out of which I 5000 shares were to be allotted at the first instance. The pattern of share allotment pursuant

S.P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J.] 653

-t'.l. to or in furtherance of the decision of the Board of Directors i.e. 8000 shares were allotted to FRG and 6475 shares were allotted to the Appellants stood admitted. It was urged that the Division Bench of the High Court committed a manifest error insofar as it failed to take into consideration the admission of Respondent No. I and Respondent No. 12 herein that 6475 shares were allotted pursuant to the Resolution of the Board during the life time of FRG. Such allotment was in fact admitted in the company petition filed by the B Respondent No. I. The learned counsel would contend that only at a later :+ stage when the Respondent No. 12 herein filed a company petition before the Company Law Board, Delhi a challenge as regards allotment of 6475 shares )! was also made. In the Company Petition although the reliefs were later on amended, pleadings were not. On a fair and reasonable reading of the c pleadings, it was submitted that only inference that can be drawn was that the subject matter of challenge centered round the allotment of 3000 shares only and transfer of their shares by the Appellants to lndreni on the premise that it being an outsider it was impermissible in terms of the relevant provisions of the Articles of Association. D ,\; Mr. Salve would argue that as the Appellants had acquired 6475 additional shares, there was indisputably no question of their abusing any ..,( position to take over the company as they had all along been incharge thereof.

Respondent Nos. I and 12, Mr. Salve would contend, having taken inspection of the documents on 10.12.1990 and company petition having E been filed on 4.3 .1991 as well as the relevant documents having been annexed thereto would clearly demonstrate that reliance thereupon had been placed by the Respondent No. I herein and, thus, on the admitted fact, the Division Bench committed a manifest error in issuing the impugned directions insofar as it failed to take into consideration that the company was a family concern F ,l in respect whereof a completely different standard should be applied. In this .,. case, it has not been found that the Respondents had been thrown out of the Management or they were deprived of the shares of BRC. It was contended that the company was not in active business and had held only some shares in Alaukik and BRC. Furthermore, there was no lack of probity or acts of misfeasance of company property on the part of the Appellants. The G composition of the parties would not change even if allotment of 3000 shares as also the transfer of Indreni are held to be invalid inasmuch as by reason of the shareholding pattern the Appellants would continue to be in the majority. The learned counsel would contend that the dispute arose only after Mrs. Puar transferred 1500 shares of Alaukik to herself and by reason thereof the H

654 SUPREME COURT REPORTS [2005] I S.C.R. A mother and daughter intended to take over Alaukik and consequently BRC. ..... Only as a face saving measure, Respondent No. 1 claiined 8000 shares which were allotted to FRG on 29 .11.1990 and not prior thereto. It was pointed out that Respondent No. I applied for succession certificate on 28.11.1989 wherein she disclosed the assets of FRG but except 22 shares in GIC she did not lay claim on any other share of GIC, far less 8000 shares. Before filing their respective company petitions both Respondent Nos. I and 12 were aware about the entire state of affairs and their purported ignorance about the internal affairs of the company is not borne out of records. In this connection, our attention has been drawn to paragraphs 7 and 8 of the statements made in the company petition by the Respondent No. I. It was pointed out that identical statements were made by the Respondent no. 12 in her Company Petition before the Company Law Board., Delhi.

Even therein no allegation as regard fabrication of document or any aggrandizement on the part of the Appellant was raised. Respondent Nos. I and 12, it was urged, prevaricated their stand from time to time and as such their plea should not have been accepted by the Division Bench.

SUBMISSIONS ON BEHALF OF THE RESPONDENTS

Mr. Ashok Desai and Mr. P.V. Kapoor, learned senior counsel appearing on behalf of Respondent Nos. 1 and 12 respectively,: on the other hand, would submit : ·

(i) Appellant No. I being in fiduciary ·position as the Director of GIC as also a family member was required to act in utmost good faith, make full and honest disclosure to other shareholders and thus he could not have made any profit by allotting shares to himself and his family members directly or indirectly and was furthermore required to inform the shareholders as regard the benefits arising therefrom so that they could participate therein. Such a fiduciary position remains, despite non-applicability of Section 81 of the Company Act.

G (ii) Appellant No. I in breach of said fiduciary duty aggrandized himself by transforming himself from a miniscule minority of 1.86% to 86% and failed to explain as to how he got such advantages to the detriment of other shareholders. The explanations offered by him as regard allotment of shares are wholly inconsistent and contradictory as conflicting versions had been set out which do not clearly and cogently explain as to how the different shares H were (a) decided to be issued, (b) offered for subscription, (c) allotted to

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, .I.) 655 Appellant No. I and (d) allotted to non-members. Transfer to lndreni was a A device to put the shares beyond the reach of the original shareholders and the said company actually received the benefits thereof by getting dividends.

(iii) It is true that Respondents came out with a different case but that was because of the fact that they had n.o knowledge about the complete affairs of the company to start with havin.g regard to the fact that the Appellants B were in control of the relevant documents. The total constellation of the circumstances would show that the Appellant No. I had aggrandized himself and his conduct had led to oppression of other members.

(iv) The power of the company court under Sections 397 and 398 being of widest amplitude the reliefs granted by the Division Bench were permissible in law.

(v) Each share of GIC was a valuable one keeping in view of the share price of BRC, Alaukik and other properties possessed by it. The value of each share of GIC which was floated at the rate of Rs. I 00 would have been worth more than Rs. 900 and furthermore by investing nine lakhs, the ~ Appellants received more than 30 lakhs of rupees by way of dividend.

(vi) As BRC had declared dividend and was a profit making company; there was no need to broad-base company. The burden to prove bonafide was on the Appellants. E

REPLY:

Mr. Salve in reply would inter alia contend that the question of aggrandizement had neither been pleaded nor proved. The learned counsel furthermore urge that there was no factual foundation as regard the allegation F -" of fraud or self-aggrandizement. He would contend that a distinction has to 'JI< be borne in mind as regard fiduciary relationship with the company and with the shareholder.

POINTS FOR CONSIDERATION: G (i) Whether the Appellant No. I in his capacity as Director of the Company had a fiduciary duty towards the shareholders.

(ii) Whether there has been a valid decision to broad-base the company by issuing additional shares. H

656 SUPREME COURT REPORTS [2005) I S.C.R.

A (iii) Whether the allotment of 6475 shares and 3000 shares in favour of the Appellants herein was valid in law.

(iv) Whether the Respondent No. 1 herein could claim title in respect of 8000 shares in the petition filed under Sections 397 and 398 of the Companies Act. B (v) Whether transfer of 9415 shares in favour of Indreni by the Appellants was valid and if not the effect thereof.

(vi) Whether the issue of oppression and/or mis-management on the part of the Appellant No. 1 herein in running the affairs of the Company C towards the Respondent Nos. 1 and 12 have been proved.

FIDUCIARY DUTY :

Chapter IX of the Indian Trusts Act provides for certain obligations in the nature of trusts. The Trust Act recognizes various kinds of trusts including resulting trust. An express trust, however, may be created by reason of an agreement between the parties. [See Barclays Bank v. Quistclose Investments, [1970] AC 567]

By reason of Section 88 of the Indian Trusts Act, a person bound in fiduciary character is required to protect the interests of other persons but the heart and soul thereof is that as between two persons one is bound to protect the interests of the other and if the former availing of that relationship makes a pecuniary gain for himself; Section 88 would be attracted. What is sought to be prevented by a person holding such fiduciary benefit is unjust enrichment or unjust benefit derived from another which is against conscience that he should keep. When a person makes a pecuniary gain by reason of a transaction, the cestui qui trust created thereunder must be restored back.

The purported breach of trust on the part of Appellant No. 1 herein relate to : G (i) Issuance of additional 15000 shares; (ii) Al!otment of 6475 shares to himself and his family members as also an HUF; and (iii) Allotment of 3000 shares out of 8000 shares which had been allotted to FRG in favour of his minor children. H

S.P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J.] 657

(iv) Transfer of 9415 shares in favour of Indreni. A Issuance of equity based capital shares under the Companies Act in relation to a private company would be governed by its Memorandum of Association and Articles of Association. It has not been pointed out that in terms of Memorandum of Association the Board of Directors acted ultra vires in adopting a resolution as regard issuance of 25000 capital shares; out of which I 5000 shares were to be issued at the first instance. Section 8 I of the Companies Act indisputably has no application in relation to a private company, the pre-requisite thereof is, thus, not attracted in the instant case. Appellant No. I, therefore, apart from Section 88 of the Indian Trusts Act in the event of its applicability did not have any statutory obligation to discharge as a trustee in this behalf.

A Director of a Company indisputably stands in a fiduciary capacity vis-a-vis the Company. He must act for the paramount interest of the company. He does not have any statutory duty to perform so far as individual shareholders are concerned subject of course to any special arrangement which may be entered into or a special circumstance that may arise in a particular case. Each case, thus, is required to be considered having regard to the fact situation obtaining therein and having regard to the existence of .J. any special arrangement or special circumstance.

The question came up for consideration as far back in 1901 in Percival E v. Wright, (1902) 2 Ch. 421. In that case, the shares of the company were in few hands which were transferable only with the approval of the Board of Directors. The shares did not carry any market price and were not to be quoted at the stock exchange. The plaintiffs therein intended to dispose of certain shares wherefor they offered 12 l.5s. per share purported to be based on a valuation which they had obtained from independent valuers a few months prior thereto. The said offer was accepted. The transaction pertaining to the said agreement was entered into but it was later on discovered by the plaintiffs that prior to and during their own negotiations for sale the Chairman and the Board were approached by one Holden with a view to purchase the entire undertaking of the company with a view to resell the same at a profit to a new company. The question of fiduciary obligation on the part of the Directors arose therein when the plaintiff brought an action against the Chairman and the two other purchasing Directors asking for setting aside the sale on the ground that the defendants as Directors ought to have disclosed the feature of negotiations with Holden when negotiating purchase of their H

658 SUPREME COURT REPORTS [2005] 1 S.C.R.

A shares. The question therein posed was : Assuming that directors are, in a sense, trustees for the company, are they trustees for individual shareholders? The Chancery Division despite holding that the Directors must act bonafide and for the best interest of the company did not accept the argument that the relationship between the shareholders inter se are the same as that of partners B in an unincorporated company holding : " ....The contrary view would place directors in a most invidious position, as they could not buy or sell shares without disclosing negotiations, a premature disclosure of which might well be against the best interests of the company. I am of the opinion that directors are not in that position. c There is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors, and named the price at which they were desirous of selling." D Percival (supra) was noticed by a 4-Judge Bench of this Court in Nana/al Zaver and Anr. v. Bombay Life Assurance Co. Ltd. and Ors., [ 1950] SCR 391 in the following terms :

The Court further held that having regard to Regulation 42 read with H Section I 05-C of 1936 Companies Act vis-a-vis Regulation 27 of 1882 Act,

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD (SINHA. J.] 659 the directors exercise a larger power to issue additional capital shares. A It is true that while referring to 'Percival', the court used the expression 'ordinarily', but if a special situation arises, it would be for the person complaining to plead and demonstrate the same.

"64-02. Relationship is with company : The fiduciary relationship of a directol" exists with the company : the director is not usually a trustee for individual shareholders. Thus, a director may accept a shareholder's offer to sell shares in the company although he may D ), have information which is not available to that other, and the contract cannot be upset even if the director knew of some fact which made -/. the offer an attractive proposition. So in Percival v. Wright a person who had approached a director and sold him shares in the company, afterwards, upon discovering that the director had known at the time E of the contract that negotiations were on foot for the purchage by an outsider of all the shares in the company at a higher figure, could not impeach the contract. In his judgment Swinfen-Eady J. said "there is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors and named the price at F .... which they were desirous of selling." ~

In Pennington's Company Law 6th Edn. at page 608-09, it is stated :

"Directors owe no fiduciary or other duties to individual members of their company in directing and managing the company's affairs, G acquiring or disposing of assets on the company's behalf, entering into transactions on its behalf, or in recommending the adoption by members of proposals made to them collectively. If directors mis- manage the company's affairs, they incur liability to pay damages or compensation to the company or to make restitution to it, but individual H

660 SUPREME COURT REPORTS [2005] I S.C.R.

A members cannot recover compensation for the loss they have respectively suffered by the consequential fall in value of their shares, and they cannot achieve this indirectly by suing the directors for conspiracy to breach the duties which they owed the company. However, there may be certain situations where directors do owe a fiduciary duty and a duty to exercise reasonable skill and care in B advising members in connection with a transaction or situation which involves the company or its business undertaking and also the individual holdings of its members."

In Dawson International pie v. Coats Patons pie, [1988] SLT 854 C Percival (supra) was relied upon holding that the Directors are, in general, under no fiduciary duty to shareholders and in particular current shareholders with respect to the disposal of their shares in the most advantageous way as directors are not their agents and as such are not normally entrusted with the management of their shares. It was, however, observed tbat if the directors take it upon themselves to give advice to current shareholders they have a D duty to act in good faith and not fraudulently nor can mislead the shareholders whether deliberately or carelessly, in which event, they may have a remedy.

A distinction, thus, has been carved out as regards the fiduciary duty of the directors with regard to the property and funds of the company as contra-distinguished from the duty of directors to current shareholders as E sellers of their shares. In case of conflict between two interests, the company's interest must be protected. The directors, however, will have a fiduciary relation if they have taken unto themselves the burden of giving advice to current shareholders.

F The aforementioned principles of law found favour with the Court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors., [198!] 3 SCC 333 wherein it was held:

"Where directors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising G control of the company, they will not be held to have failed in fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interests of the company. If the directors' primary purpose is to act in the interests of the company, they are acting in good faith even though they also benefit as a result." H

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA,).) 661 ~ .. In Needle (supra), this Court furthermore noticed Punt v. Symons, (1903) A 2 CH 506 and opined in the following terms :

"105. Jn Punt v. Symons, (1903) 2 Ch 506: 72 LJ Ch 768: 89 LT 525: 52 WR 41, and which applied the principle of Fraser v. Whalley, 71ER361: 11LT175, it was held that: B Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting ..... power, they ought to be restrained from holding the meeting at which > the votes of the new shareholders were to have been used.

But Byrne, J. stated : c There may be occasions when Directors may fairly and properly issue shares in the case of a company constituted like the present for other reasons. For instance it would not be at all an unreasonable thing to create a sufficient number of shareholders to enable statutory D powers to be exercised . ... 106. Peterson, J. applied the principle enunciated in Fraser 71ER361 ~ : II LT 175 and in Punt (1903) 2 Ch 506: 72 LJ Ch 768 : 89 LT 525: 52 WR 41 in the case of Piercy v. S. Mills & Co. Ltd., (1920) I Chancery 77: (1918-19) All ER Rep 313 (Ch D): 122 LT 20: 35 E TLR 703. The lea~ed Judge observed at page 84 :

"The basis of both cases is, as I understand, that Directors an; not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of F defeating the wishes of the existing majority of shareholders ..... ")... .... What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the Company ... " G In Needle Industries (supra) and Nana/al Zaver (supra) was affirmed stating the sole test is whether the issue of shares is simply or solely for the benefit of the Directors holding :

"If the shares are issued in the larger interest of the company, the decision to issue shares cannot be struck down on the ground that it H

r 662 SUPREME COURT REPORTS [2005] I S.C.R.

A has incidentally benefited the Directors in their capacity as shareholders."

Fiduciary duty of the Directors to the company should not be equated with the duty to the shareholders.

B In Peskin and Anr. v. Anderson and Ors., [200 I] I BCLC 372, Percival (supra) as also other decisions taking similar or contrary view were noticed by the Court of Appeal including the judgment of the Court of Appeal in New Zealand in Coleman v. Myers as also Court of Appeal of New South Wales in Brunninghausen v. Glavanics, (1999) 46 NSWLR 538 and held that the directors had no fiduciary duty to the shareholders in the facts and c circumstances obtaining therein. However, observations were made therein that such duties may arise in special circumstances demonostrating the salient features and well-established categories of fiduciary relationship such as agency which involves duties of trust, confidence and loyalty.

D Absence of special circumstances or special reasons as pointed out hereinbefore normally would not bring in the concept of fiduciary relationship in a director vis-a-vis the current shareholders. However, iu Coleman (supra) ... and Brunninghausen (supra) it was held that the fiduciary duties of directors to the shareholders exist in the specially strong context of the familial -.\. relationships having regard to their personal position of influence in the E company concerned.

We may at this stage consider the case laws replied upon by Mr. Desai.

Mis. Dale & Carrington Inv/. P. ltd. and Anr. v. P.K. Prathapan and Ors., (2004] 7 SCALE 586, requires a closer scrutiny. F In that case one P.K. Prathapan (Prathapan), an NRI through his mother induced Ramanujam to promote a company by making initial investment of Rs. 5 lakhs in shares. Prathapan, the principal shareholder of the Company came to know that the Board of Directors in its meeting held on 24th October, 1994 and chaired by Ramanujam, adopted a resolution on the premise that G a sum of Rs. 6,86,500 stood to the credit of said Ramanujam and in lieu thereof equity shares of Rs. I00 each would be allotted in his favour. Prathapan was not intimated about the said meeting. By reason of the said act, Prathapan who was a majority shareholder in the Company was reduced to a minority. The case of Prathapan was that Ramanujam did not contribute any money H from his own resources for the purpose of starting the company and he all

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J.] 663 along drew a handsome salary for working as Managing Director thereof. A The charge of oppression and mismanagement against Ramanujam by Prathapan before the Company Law Board succeeded. However, the only relief which Prathapan obtained was a direction upon him to sell his shares to Ramanujam which was questioned by him. This Court held that the directors act on behalf of a company in a fiduciary capacity and their acts and duties are to be exercised for the benefit of the company. It, however, while analyzing B the acts of a director as an agent of the company observed that in a limited sense they are also trustees for the shareholders of the company. However, without discussing the limitations of such fiduciary relationship, it was observed :

"15 The fiduciary capacity within which the Directors have to act c 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 and honest disc.losure to the shareholders regarding all important matters relating to the company. It follows that 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 by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act which contains certain 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 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."

Evidently, therefore, the ratio which emerges from the decision is that the duty to disclose as regard issue of additional shares is relatable to proper purpose thereof. If the purpose is proper and the action of the director is bonafide, the ratio should not be extended so as to hold that such a duty of the director towards the shareholder is absolute despite the fact that there is no legal requirement therefor. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the company. Dale and Carrington (supra) is not an authority for the proposition that the purported fiduciary duty of a director towards the shareholder is absolute although the transaction H

664 SUPREME COURT REPORTS [2005) I S.C.R.

A in question may not have a direct co-relationship with the affairs of the +... company.

Moreover, the Bench did not have the advantage of considering the 4- Judge Bench decision of this Court in Nana/al Zaver (supra). It furthermore did not have the advantage of noticing the decisions of other jurisdictions which had been noticed hereinbefore.

The Court, it is interesting to note, noticed Needle Industries (supra) as regards the power of the company to issue new shares but the legal effect thereof was not considered in details. The directors have a power to issue additional capital shares and in the process may obtain some pecuniary gain but only when such pecuniary gain is obtained through ulterior motive, they would be answerable to the shareholders.

It is also interesting to note that while applying the 'extraneous purpose test' or 'ulterior motive test', the Court noticed Piercy v. S. Mills & Co. Ltd, D (1920) I Ch. 77 wherein it was held :

"The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of E defeating the wishes of the existinf,\ majority of shareholders."

The expression 'merely' assumes significance.

Significantly, in Needle Industries (supra) it was categorically held that the Directors have power to issue shares at par even if their market price is p higher being primarily a matter of policy. (See para 120)

'Proper purpose' doctrine and the doctrine of 'fairness' vis-a-vis the doctrine of' bona fide' was considered in view of its findings that the allotment of all additional shares was gained by Ramanujam through manipulations and commission of acts of frauds upon becoming the Managing Director of the G Company with a view to gain sole control of the management thereof and to the exclusion of Prathapan.

The ratio in Dale and Carrington (supra), thus, must be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a director to the company extends to a H shareholder so as to entitle him to be informed of all the important decisions

S.P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J.] 665 taken by the Board of Directors. Such a broad proposition of law, if understood A to have been laid down in Dale and Carrington, would be inconsistent with the duty of a director vis-a-vis the Company and the settled law that the statutory duty of a direction is primarily to look after the interest of the company.

In Bajaj Auto Ltd. v. N.K. Firodia and Anr. etc., [ 19/0] 2 SCC 550, the B Court was concerned with the discretionary exercise of power by the Directors in terms of Section 111 (3) of the Companies Act. In the 1ight of refusal by + director to register a transfer, the Court held that it is necessary for the )- directors to act bonajide and not arbitrarily in the following terms :

"12. Article 52 of the appellant company provided that the Directors C might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation of a proposal. Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will Act for the paramount D interest of the company and for the general interest of the shareholders because the Directors are in a fiduciary position both towards the company and towards every shareholder. The Directors are therefore required to act bonafide and not arbitrarily and not for any collateral motive." E (emphasis supplied)

This Court therein also applied the bonafide test of the Director and for the benefit of the company as a whole. In that case, the directors assigned reasons which were tested from three angles view, viz., (i) whether the directors acted in the interest of the company; (ii), whether they acted on a wrong F principle; and, (iii) whether they acted with an oblique motive or for a collateral purpose. It was observed in Mis. Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala and Ors., [1962] 2 SCR 339 that the action of the directors must be set aside if the same was done oppressively, capriciously, corruptly or in some other way malafide. In this case, this Court is not faced with such G a situation.

In Coleman and Ors. v. Myers and Ors., (1977) 2 NZLR 225 the gist of the complaint made by the appellants against the first respondent was that he planned to acquire total control of the company at virtually no cost to himself by means of selling the Strand-Coburg and other properties of the H

666 SUPREME COURT REPORTS [2005] I S.C.R.

A company and making use of its liquid capital reserves; that his inside knowledge of the company's affairs and the advice he obtained showed him that there were good prospects of accomplishing this, leaving him sole owner of an unencumbered asset worth some millions; and that he not only refrained from disclosing to the shareholders generally his plan and the magnitude of B his potential gain, but also made misrepresentations tending to conceal the plan.

In the aforementioned factual backdrop while holding that mere status of a company director would not create any responsibility towards a + shareholder but it was observed that the standard of conduct required from C a Director in relation to dealings with them will depend upon all the surrounding circumstances and the nature of responsibility which in a real and practical sense he has assumed.

In Pennington's Company Law, at page 609, on Coleman (supra), it is commented: D "It is uncertain whether this reasoning can be extended to other situations where directors owe duties to the company but the relevant decision has to be made by its members individually or collectively, and the directors advise them as to the decision they should make. Such situations would include a proposed sale or disposal of the company's assets and undertaking, a proposed merger or division of the company, a proposed reorganization of the company's share capital affecting existing members and a proposal for the voluntary liquidation of the company."

No law in absolute terms, thus, had been laid down therein. In the instant case, there had been no transaction of sale and purchase of shares between the director and the shareholder.