- SMT. CLAUDE-LILA PARULEKAR v. MIS. SAKAL PAPERS PVT. LTD. AND ORS.

A viz. the issuance of 17, 666 equity shares. v. 1. The decision to raise the issued capital of the company and to allot the shares at par was taken at an Annual General Meeting held on 16.11.1985. It was resolved at that meeting to immediately issue increased share capital of Rs. 17,66,600 of B 17,666 equity shares of Rs. I 00 each to any person whether a member of the company or not. It was further resolved that the ...-.. decision would be ratified by convening a general body meeting preferably in the month of January/February, I9.86 after giving proper notice and explanatory statement. ~ c V.2. The notice of the Annual General Meeting was given on I3. l0. I 985. Although details of ordinary business and special business were given, there was no indication whatsoever that -- there would be any decision taken with regard to the increase in the issued capital and allotment of shares in the notice. According to the respondents, after the notice of the Annual General Meeting D had been issued on 13.10.85, on 5. I l.85, the. Ministry of Finance gave notice to the company extending the validity of a sanction for foreign exchange loan to 30. I l .85 and stating.that no further extension would be/ granted. On 9 .1 t'.1985 a letter dated

7. I I~ I 985 was sent to the company by Modular Finance and E Consultancy Private Limited (the respondent No. 12 before us and a member of Pawar Group) proposing that the share capital of the company be increased and requesting the issue to be decided at an ensuing AGM. On l l.l l.1985 a letter was also

F received by the company from the United Western Bank advising the company in view of its expansion programme, to increase its share capital. - V.3. According to the respondents, the increase was by reason of the urgent need of the Company to purchase machinery. We are unable to agree. The purchase of the machinery was in contemplation of the company from much prior to the date of G the notice. The alleged letter from the Ministry of Finance was not produced before the High Court and we are not prepared to allow the same to be brought on record at this stage.

V.3. 1. The Division Bench affinned the finding of the learned Single Judge that the need to increase the issued capital from Rs. H 7,33,400 to Rs. 25 lakhs was not established. Indeed the Division

CLAUDE-LILA PARULEKAR "· SAKAL PAPERS PVT. LTD. [RUMA PAL, J.] 1105

Bench went on to find that the action· of issuing the increased share capital clearly indicated that the respondent No. 5 and his group who were in control of the company, had decided to make a fresh issue of share capital to themselves at par so as to strengthen their control over the company.

V.4. We have already noticed that Article 93 specifically provides inter alia that every notice of a meeting of the Company shall contain a statement of the business to be transacted thereat and no General Meeting, Annual or Extraordinary, shall be competent to enter upon, discuss or transact any business which has not been specifically mentioned in the notice or notices upon which it was convened. c V.4.1. Additionally, in terms of Article 94, the relevant extract whereof is quoted hereunder :

"94 (a) In the case of an Annual General Meeting all business to be transacted at the meeting shall be deemed special excepta ..

(b) xxx xxx xxx xxx

(c) Where any item or business to be transacted at the meeting is deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning ach spechl item of business, including in particular the nature and extent of the interest, if any, therein, or every Director, Secretaries and Treasurers, if any, and the manager, if any.

V.4.2. The increase in issuance of share capital does not fall within the exceptions carved out in Article 94 as not being special business. Article 94 reflects the substance of Section 173 of the Companies Act, 1956 and it was therefore, incumbent for notice to be given not only indicating the issuance of the share capital as a special item of business but also giving a statement setting out all material facts relating thereto. The violation of this Article by the company is patent and the Annual General Meeting is to the extent of the violation vitiated thereby.

V.4.3. In Pacific Coast Coal Mines Ltd. v. Arbuthnot and Ors., (1917) AC 607 PC, the Privy Council was of the opinion; H

l 1106 SUPREME COURT REPORTS (2005] 2 S.C.R. i \ A "that to render the notice a compliance with the Act under \ which it was given it ought to have told the shareholders, including those who gave proxies, more than it did. It ought l to have put them in position in which each of them could have judged for himself whether he would consent, not only to buying out the shares of directors, but to releasing possible B claims against them. Now this is just what it did not do and therefore, quite apart from the fact that the meeting was held

c in half an hour from the time the Act passed and before the shareholders could have had a proper opportunity of learning the particulars of what the Legislature had authorized, their Lordships are of opinion that the notice was bad, and that " what was done was consequently ultra vires". (pg.282)

V.4.4. Ag~in_ in Baillie v. Oriental Telephone and Electric Company Ltd, (1915)1 Ch.D.503 (CA) it was.said by the Court of Appeal;

" ......J feel no difficulty in saying that special resolutions D obtained by means of a notice which did not substantially put the shareholders in the position to know what they were voting about cannot be supported; and in so. far as these special resolutions were passed on the faith and footing of such a notice the defendants cannot act upon them." E (See also LIC v. Escorts, [1986] 1 SCC 246 at pg. 343).

V.5.1. The respondents have relied on Article 94 (e) which says that" the company shall also carry out the requirements of Section 188 of the Act" to contend that due notice was given under Article 94 because the letter of Modular Finance had been forwarded to the shareholders.

V.5.2. Section 188 provides that a meeting could be requisitioned by the prescribed number of members, after notice of any resolution which may properly be moved ar;id is intended to be moved at a meeting together with a statement with respect to the matter referred to in any proposed resolution. Assuming that Modular Finance's letter was in fact circulated, this could hardly be termed to be compliance with the requirement of Section 188 of the Act which deals with meetings called at the instance ofrequisitionist and circulation of a statement by the requisitionist of a proposed resolution and a statement in support thereof. Moreover, such a

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notice in tenns of the proviso of Sub Section 3 of Section 188 A is required to be given "in the same manner and, so far as practicable, at the same time as notice of the meeting, and where it is not practicable for it to be served or given at that time, it shall be served or given as soon as practicable thereafter''. Further it is clear from Article 94(e) that compliance with Section 188 was in addition to the requirements with the other parts of Article B 94 which admittedly have not been complied with.

V.5.3. The Division Bench found that there was no explanatory ,.. statement annexed to the notice and held that the respondents ~ certainly committed an irregularity in not mentioning the proposal to increase and allot the share capital on the agenda of the c annual general meeting. However, it went on to hold that the irregularity did not vitiate the decision because it could be cured since the Pawar group already had majority control and also because the decision had been taken at the annual general meeting that an extraordinary general meeting would be called after proper D notice to ratify the fresh issue of 17666 shares at Pawars. V.5.4. We are unable to accept the reasoning of the Division Bench. The two grounds which persuaded them not to interfere with the fresh issue are questionable . For one, we have already come to the. conclusion that the sale of 3417 and 93 share to the Pawar E Group was bad. The Pawar group did not legally have the majority to push through the decision to increase the share capital or to allot the further shares to themselves. For another, the majority cannot be permitted to ride rough shod over the provisions of the Articles and the Companies Act merely because they could if they so desired follow the proper procedure. The F haste with which the Pawar Group sought to ensure their position in the company is evident from the fact that a Board Meeting was held immediately after the Annual General Meeting on 16.11.1985 at which the Board resolved to issue the additional 17, 666 shares at par to the Pawar Group. There was no notice G· given of the Board meeting at all. V.6.1. The Respondent Company was bound to offer the further shares on a fresh issue of capital to the existing equity share holders in proportion to the capital paid up on the shares at that date. The Division Bench noted that this was provided in Section 81 of H

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A the Companies Act. However, because Section 81(3) does not apply to a private limited company (which the company was at that stage) and since according to the Division Bench, the Articles of Association did not require such further issue of shares to be allotted in any particular manner to the existing share holders, the allocation of the further issue to the respondent No. 5 and B his group was not illegal or contrary to law. V.6.2. As a matter of fact the finding as to the absence of such a requirement in the Articles of Association of the Company was erroneous. Increase of share capital is dealt with in Articles 14

c and 15. Article 15 says : ~ "Subject to the directions that may be given by the meeting that sanctions the increase of capital (i) such new shares shall be offered to the persons who are at the date of the offer members of the Company in proportion as nearly as circumstances admit to the capital paid up on their shares at that date, (ii) the offer aforesaid shall be made by notice specifying the number of shares to which the member is entitled and limiting a time not less than fifteen days from the date of the offer, within which the offer, if not accepted, will be deemed to have been declined, (iii) after expiry of the time specified in the notice aforesaid or on the earlier intimation from the member to whom such notice is given r / that he declines to accept the shares offered, the Directors I

may dispose of the same in such manner as they think most ' .- beneficial to the Company." (emphasis added) v

F V.6.3. No offer was made by notice in writing in terms of this Article. The fresh shares were, as we have seen, allotted on the day they were issued before the expiry of 15 days without waiting for the expiry of the period. The allocation of shares to the Pawars' group contrary to this Article was invalid. V.6.4. No court could possibly object to a decision on merits provided G it is taken in accordance with law. The decision to issue all the additional shares to the Pawar Group at par may not by itself have warranted interference were it not for the manner in which the entire exercise was undertaken.

V.6.5. During the course of the hearing both before the Division Bench H

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and before this Court, the respondents offered to make an A allotment of the issued capital to the appellants to participate prorata in the additional issuance. The offer did no more than what the company's articles required to have been undertaken. VJ. Having effectively held in favour of the appellants, the question finally to be determined is what reliefs can be granted to them. · B Reliefs

VJ.l. The respondents contended that the relief of cancellation of 17, 666 shares cannot be granted in a petition under Section 155 petition as any reduction of capital must be made strictly in , C accordance with Sections 100 to 104 or Section 402 of the Companies Act.

VJ.2. The issue need not detain us as there was no such prayer made by the _appellants. They have asked only for rectification of the share register by deletion of the names of the Pawar Grpoup as shareholders in the company. The learned Single Judge merely directed the Board of Directors to dispose of the fresh shares, one can only assume, in accordance with the Articles of the Company and the Act. VJ.3. Having effectively held on all issues in favour of the appellant the question remains as to whether we should, in exercise of our discretion under Section 155, grant the appellant the relief of rectification of the shares as claimed. Although the logical conclusion of our findings would be to set aside the transfers and restore the status quo ante, the question is should the share register of the company be directed to be rectified now in respect f of shares, the impugned transfer of which took place more than 20 years ago? The respondents have submitted in the course of the hearing that this Court should not in any event disturb the status quo but should mould the relief by awarding compensation, if necessary as prayed for by the appellant. They have referred to the decision in Needle Industries (India) Ltd. v. Needle G Industries (Newey) India Holding Ltd., [1981] 3 SCC 333 in support of this submission. We agree. There has been a sea change in the factual scenario. Shantha has died. The company has become a public limited company. The respondents have been at the helm of the company more than, two decades during H

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A the legal struggle. Many decisions must of necessity have been taken and implemented. The situation cannot now be unscrambled. It is a course of action which would make the company disfunctional harming the interests of the whole body of share holders, affect company's employees, its creditors and customers. It is not as if we are able to grant any relief directly B to the appellant except to the extent of setting aside the transfer. The appellant will still have to pursue her remedies for effective __, relief in the two pending suits in the District Court of Pune in which the appellant has prayed for specific performance of the contracts for sale of the shares. The outcome of the suits is c uncertain. What is certain is that whatever the outcome of the litigation it will be another long round of litigation. Yet another factor to be borne in mind is that the appellant had her own role to play in contributing to the situation which she had to face eventually. Admittedly, Shanta and the appellant ultimately accepted the Chartered Accountant's report. As we have noted, D no reason whatsoever was given for the sudden change of attitude. If they could agree subsequently to pay the price they could have done so earlier, paid the price and then challenged the value. Further, the Single Judge also gave the appellant and

E Shanta an opportunity of paying the share price into the Court within a period of six weeks. Had the appellant and Shanta done so, they might have been in a stronger position vis-a-vis the Pawars in the appeal Court. -- · VI.4. In these circumstances and weighing in the balance the comparative advantages and disadvantages of granting the F appellant the relief of rectification, we are of the view that it would not be appropriate at this stage to exercise our discretion to grant the relief of rectification. However, the fact remains that· the appellant has been wronged and she is entitled to be compensated. Section 155 of the Companies Act, allows the giving of damages in addition to or in lieu of rectification. In G the pending suits, the appellant has put forward alternative prayers for payment of compensation of Rs. 3 crores on account of the 3417 shares and Rs. I crore for the transfer of the 93 --'·

shares in the event specific performance of the contracts was not grantable. It was pointed out by some of the respondents' counsel, without prejudice to their contentions on merits, that H

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the figure specified in the plaint, though on the higher side, couldform a rough and ready basis to quantify the compensation. Having due regard to these submissions and in order to give a quietus to the litigation we are of the view that the ends of justice would be met by directing that the appellant should be compensated with an amount of Rs. 3 crores to be paid by the company to the appellant in full and final settlement of the appellant's claims in respect of the 3417 and 93 shares. Additionally, the company will also allot shares to the appellant out of the 17, 666 shares on par proportionate with the appellant's present share holding. We are told that the appellant is at present ..- employed by the company and is also a Director of the company. C The appellant shall continue in this capacity for the appellant's life time. VJ.5. The appeals are accordingly disposed of without any order as to costs.

K.K.T. Appeal disposed of. D'