COMPANY IAW BOARD, NEW DELHI BENCH

lN THE MATTER UNDER SECTION 3971398 OFTHE COMPAN|ES ACT,1956

CP No.1a(ND)/2011

Present: Shri Dhan Raj, Member

IN THE MATTER OF:

M/s.EFN Global lmpex Private Limited

205, Commercial Arcade,
South City-1,
Gurgaon-122 001
Ha rya

na

AND
IN THE MATTER OF:

Lieutenant Sharad Saxena

D-19, Ground Floor,

Petitioner

South City-1,
Gurgaon-122 @1,
Haryana

vs.
1.

M/s.EFN Global lmpex private Limited

205, Commercial Arcade,

Respondent-L

South City-1,
Gurgaon-122 001
Haryana
2.

Mr.Muneesh Kumar Saxena

D-19, Ground Floor,
South City-1,
Gurgaon-122 001,
Haryana

Major General (Retd.) Mahendra Kumar Saxena,AVSM

ffi

Respondent-2

-)

Vidya Kutir, Village Bhondsi,

Sohna Road,
Gurgaon-122 001Haryana
4.

Respodent-3

Brigadier(Retd.) Saran Prasad Datta

House No. 1296, Sector-17C
Gurgaon-122 001
Haryana

5.

Respondent-4

Mr.Janardhanan Ravesanker
VRR Complex, First Floor, 3/28,

Marudhamalai Main Road,

Vadava lli,

Coimbatore-64L04t
Tamil Nadu
6.

Respondent-5

Mr.Pradeep Lakhani
House No.879, Sector-4O,

Gurgaon-122 001
Haryana
7.

Respondent-6

Mr.Uday Chawla
309, Sector-19,
Pocket 3, Dwarka,

New Delhi-110 075

PRESENT:

PETITIONERS:

1. Shri Rakesh Khanna, Advocate

2. Shri Udit Kumar, Advocate

3. Ms.Arzu Chimmi, Advocate

F'$
-..tlY,-g

Respondent-7

4.

Shri Sharad Saxena, Advocate

RESPONDENTS:

5.

Shri V.K.Dahiya, Advocate

ORDER

(Date offinal hearing: 13th December,2OL2l

In this case, petition has been fired u/s 397/3gg of the companies
Act' L956 against the acts of oppression and mismanagement by the
Respondents. The Respondent company was incorporated on Gth June, 1995
and
is presently having its registered office at 205, commercial Arcade,
south city-1,
Gurgaon-122 001, Haryana. The petitioner held equity shares amounting
ro
45.13% of the issued and subscribed share capital of the company.
However, it
has been alleged that due to iilegar acts of the Respondents, the holding
of the
Petitioner has been reduced to 7.640/o of the issued, subscribed and paid-uo
capital of the company. At present, there are three members in the
company ano
thereby, the Petitioner is more than one-tenth of the total number
of its
members and is therefore eligible under section 399(1)(a) of the
companies
Act,
1956 to file the Petition. Initiaily, the petitioner was appointed
as Manager (eA)

in the company by retter of appointment dated 1't september, 1997

and

thereafter, on 7th october, t997, the petitioner was appointed

as a whore-time
Director of the company. The petition contained the foilowing
instances of
oppression and mismanagement as alleged by the petitioner:_

(i)
..

To divest the petitioner of his sharehording, R-2 and R-3

by exerting undue
influence and famiry pressure, got the petitioner to sign Transfer
Deeds in
respect oJ 2349 equity shares on the pretext that the
same were required
as collateral for obtaining loan from some private

financiers to fund the

new projects of the company. No such loan was ever raised
against the
said 2349 equity shares and no consideration wnatsoever
was paid to the

s9

- L-tPetitioner and even the share certificates were also not returned back to
the petitioner.

On 3L't March, 2006, 5,000 equity shares at par had been unauthorizedly

to

and thereby, Paid-up Share Capital of the Company was

increased from Rs.11.00 lakhs to Rs.16.00 lakhs.

allotted

(iii)

R-3

2349 equity shares taken from the Petitioner on the pretext, for being used

as collateral for obtaining loan from some private financiers were also
illegally transferred to R-3 by misappropriating the documents signed by
the Petitioner on good-faith.
(iv)

No Shareholders' Meeting was ever held for the allotment of 5,000 equity
shares at par, no shares were ever allotted to any existing shareholders, no

approval was sought from any existing shareholders and the said transfer
and allotment was in comolete breach of the Articles of Association of the
Company and against the law.

(v)

The company issued 1,000 equity shares at par illegally and unauthorizedly

on 20th March, 2007 to R-7 (Shri Uday Chawla) without holding any
statutory meeting for such allotment or offering the shares to any other
existing shareholders or taking approval thereof from them.
(vi)

5,000 equity shares earlier unauthorizedly issued at par to R-3 were

transferred to R-2 and 1,000 equity shares earlier unauthorisedly issued to
R-7 were also transferred to R-2. Besides, 2371shares held by R-6 were also
transferred to R-2. Thus, the shareholding of R-2had been fraudulently
increased from 3665 shares to L2,036 shares out of total subscribed and
paid-up 17,000 equity shares. Hence, R-2 emerged as the ultimate
beneficiary of all the fraudulent share transactions and the percentage
shareholding of R-2 increased from 33.32o/o to 70.80% of the paid up capital
of the company.

z-*$ti)

:;'try'
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-s(vii)

The Petitioner expressed his desire vide e-mail dated 5tn March, 2007 not to

continue

in the

day-to-day working/employment after 31.3.2007.

However, as stated in the Petition, the Petitioner did not resign as Director
of the Company and continued to be a shareholder of the company.
However, a fraud and fabricated resignation letter dated 11th August,2008

in the name of the Petitioner without the petitioner's signature was

submitted to the ROC fraudulently showing that the Petitioner had resigned
from the Directorship of the company. However, no such resignation was
ever submitted by the Petitioner.

(viii) On 16th December,

2008, the Respondents without holding any Statutory

Meeting, fraudulently altered the objects of the company by quoting
fabricated Special Resolution dated 1" December,2008 whereas no sucn
Shareholders' Meeting/EGM was convened.

(ix)

On 23'd December, 2008, anothe r 17,210 equity shares were

again

fraudulently issued at par to R-2 and thereby, the percentage shareholding

of R-2 increased from 70.80% to 85.489% of the paid-up Capital of the
com pa ny.

(x)

on Annual Return and Balance Sheet for the year 2OO9-10, the
Petitioner has pointed out certain instances of fabrication, false
representations and manipulations of accounts of the company with

Based

fabricated and falsified figures.

2.

In the reply, the Respondents have stated that the company is not in the
nature of Partnership and there is no provision in the Articles of the company that
the shareholding of the shareholders will remain in the iame ratio. Rather, the
company not being a public company, even the provisions of Section g1 of the
companies Act, 1955 are not applicable to the company and.there is no need of

offering any further shares to all the existing shareholders.. Filrther, under the

-6
Articles of the company, shareholders' consent is not required for issue of further
shares which can be done only by the Board of Directors and therefore, reduction
of the Petitioner's shareholding in the company cannot in any event amount to
oppression within the meaning of sections 397 and 399 of the companies Act,
1956. The Respondent has also informed that in or about 2007-0g, there was a

settlement between the parties pursuant to which it was agreed that the
Petitioner although will remain the shareholder in the company, he will not
interfere in any manner in the company and in consideration thereof he was
permitted to operate his own company namely, M/s.Reefknot Management
Private Ltd. which is in the same field of as that of the Respondent company.

with regard to the transfer of shares, the Respondents have clarified that
2349 equity shares of Rs.100/- each were sold by R-3 to the petitioner at a
nominal price of Re 1/- per share as gift to the petitioner. In regard to the
Resolution for allotment of 5,000 equity shares to R-3 passed on g.2.2006,
Respondents have submitted that the petitioner had himself signed the relevant
Resolution on 13th February, 2006 itself.

The Respondents have also stated that the petitioner has suppressed
material fact that he has been secretly operating his own company and the
auditor of which is the same person who had also filed the intimation of most of
the resolutions with Roc allegedly passed without knowledge of the petitioner.
In september 2009, admittedly the petitioner surrendered Directorship of
the Respondent company, collected the gratuity and settled the accounts with
the Respondent company. Thereafter and till the filing of the present petition i.e.
January, 2011, the Respondents did not hear anything from the petitioner except
he sent a formal letter of resignation in 200g. Further, the petitioner has now
forged and fabricated the letters dated 5th November, 2006, 5th January, 200g and
20th March, 2008

the false story.

to cover up the delay and for purposes of cooking up entirely

Further, the respondents have stated that the petitioner was appointed a
director of the company merely because he was younger brother of the R-2. lt
has been denied that the petitioner was made to sign the transfer deed on the
false pretext as alleged. lt has also been denied that no consideration was paid.
The sum of Rs.2,34,900/- was paid by cash by R-3 to the petitioner on 1.g.2006.
The allotment of 5,000 shares in favour of R-3 on g.2.2006 was approved by the

petitioner also which is proved by his signature dated t3.z.2oo6 on the minutes of
meeting of 8.2.2006. The petitioner did not object at any time to any allotment
or transfer of shares and the Respondents never received the alleged letter dated
5.1-1.2005. Notice for the meeting of board of directors in which allotment of
1,000 shares

to Mr.uday chawla

was approved and all other such meetings, was

given to the petitioner by hand delivery but he did not attend the meetings. The
petitioner ceased to be director in september, 2007 itself when he surrendered
the directorship as per the settlement and collected his gratuity and finally settled

all the accounts with the company as a director. The petitioner delivered a
confirmation resignation letter dated 11.9.2009 duly signed by him to the
Respondents.

3.

In the Rejoinder, the petitioner has denied that the respondent company
was ever in nature of partnership or that there are no provisions in the Articles

of
the Respondent company that require offering further shares to all the existing
shareholders in case of any further or fresh issue of shares of the Respondent
as
alleged. lt has also been denied that the shareholders, consent is not required for
issuance of further shares or that such further issuance of shares
can be done oy
the Board of Directors without any approval or consent from the existing
shareholders of the Respondent company. Further, the petitioner submitted
that
in terms of Article 9 of the Articres of Association of the Respondent
company,
further issuance of shares shall first be made to the existing shareholders
and only
upon the refusal, the shares will be issued to the outsiders. rt has
arso been
submitted that the Board of Directors of the Respondent company
by issuing
5'000 fresh shares on 10.3.2006 to R-3 and then again, by issuing 1,000
fresh
shares on 2O.3.ZOO7 to R-7 have clearly and blatantly
Wrth-malafide intentions
violated Article 9 of the Articles of Association of the Respondeni
Company as no
)l

j.-;l

>l-

offer was ever made to the petitioner for the fresh issuance of shares. The
Petitioner further submitted that the Board of Directors of the Respondent
company has acted in a blatantly fraudulent, clandestine and illegal manner to
dilute the shareholding of the petitioner and 6000 fresh shares were issued in an
illegal and unauthorized manner to R-3 and R-7 and were subsequenfly
transferred on 4tn october,2ooT to R-2. In addition, the petitioner has denied
that there was any alleged settlement of agreement whatsoever at anv time
between the Petitioner and Respondent regarding incorporation or operation of
any company or organization by the petitioner. Rather, the petitioner left the
day-to-day employment of the Respondent company in March, 2oo7 in view of
the fraudulent action and mismanagement of the Respondent company by the
Respondents. But, the Petitioner continued to be a Director and shareholder of
the Respondent company. Apart from this, the petitioner has denied that
M/s.Reefknot Management pvt. Ltd. promoted by the petitioner is a competitor
of the Respondent company. The petitioner has clarified that M/s.Reefknot
Management Pvt. Ltd. was promoted by the petitioner and was incorporated on
L4th May, 2007 and operates in the field of sports commentary and Management
Consultancy whereas the Respondent Company operates in the field of euality
Assurance Inspection and Audit services and manufacture of packaged beverages
and packaged water.

R-3.

It has been denied that the petitioner received any shares as a gift from
The Petitioner has submitted that in 2002, the petitioner purchased 2,349

shares of the Respondent company from Respondent -3 at mutually agreed price

of Rs.2349/- based on the loss making history of the Respondent Company and

additionally based on the financial and material support provided by the

Petitioner from time to time to R-3 being father of the petitioner to our domestic
expenses and household expenses. Further, the purchase of 2349 shares was
completely bona-fide and duly recorded in the records and register of the
company including the share transfer form. Further, the petitioner has denied
that R-3 at any time whatsoever purchased 2,349 shares back from the petitioner
at a price of Rs.2,34,900/- or that the petitioner received any cash from R-3 in
respect of such sale of the said 2,349 shares as alleged. The petitioner submitted

- 1that the said 2,349 shares were fraudulently transferred in 200G from petitioner
to R-3. The petitioner has also submitted that the Respondents fraudulently claim
that the above said alleged transfer of 2,349 shares from the petitioner to R-3 was
approved in the meeting of Board of Directors allegedly held on 31.3.2006 but the
respondents have not filed the original minutes of the said Board meeting and
neither have the respondents shown the original minutes of the said Board
meeting to the Petitioner during inspection of records. The petitioner has also
denied that he was provided by hand or by any other means any notices to any
meeting of the Board of Directors wherein the allotment of 1,000 shares to R-7
was approved as alleged.

4.

While arguing the matter, the petitioner Advocate submitted that the
Respondent company is not a Quasi-Pa rtnersh ip and the petitioner has not
claimed status of Quasi-Partner. Further, the petitioner discovered the first
unauthorized allotment (5000 shares) and illegal transfer (2349 shares) in
November, 2006 and raised objection to the company. The Respondent issueo
shares without approval of existing shareholders in blatant violation of Article 9 of
the Articles of Association of the company. After manv months of negotiation
between the promoters who were family members, the Board of Directors in its
meeting dated 7th May, 2008 resolved to cancer and reverse all snare
transactions, allotments and transfers made after 30.9.2005 and as per the Board
Resolution therein, the Petitioner as Director in May, 200g submitted Form-32 to
Roc. However, instead of reversing the fraudulent share transactions, the
Respondents stopped sending Notices to petitioner after May, 200g and delayed
finalization of accounts and annual returns of the company by over a year. To
avoid suspicion, the company continued to pay Director's perks to petitioner till
November, 2009. The Petitioner suspecting foul-play directly approached the
Roc in December, 2010 and Roc provided certified records of the company to the
Petitioner on 6th January, zot!. Then, the petitioner filed the petition in cLB

within 6 weeks of discovering the fraudulent actions through Roc records. Apart
from this, the petitioner advocate has mentioned that there are several
judgments to show that Limitation Act is not applicable to cases under section

397/398 especially when the acts

lt\

of

oppression and mismanagement are

continuous in natu re.

The petitioner advocate has put both the arguments allegation-wise

u

as

noer:-

A:

Transfer of Shares:

(i)

on 31" March, 2006, 2349 shares of

petitioner were fraudurentry

transferred to R-3. on this date, there was no share Transfer Deed in
existence and therefore, this share transfer was completely illegal and
fraudulent. The Respondents have not produced any Transfer Deed dated
on or before 31.3.200G in respect of this share transfer.

(ii)

To cover up this illegal transfer of 2349 shares, the Respondents after 4

months obtained a signed Transfer Deed from the petitioner on the pretext

of collateral for loan. The signed rransfer Deed dated 1't August, 2008 is
not registered, the revenue stamps are not cancelled and the said transfer
deed cannot be held valid for share transfers conducted on 31.3.2006
which is four morrths before the date of Transfer Deed.
(iii)

The Petitioner never sold these 2349 shares to R-3 and therefore, there is
no question of making any profit. The petitioner has never received any

compensation of Rs.100/- per share as falsely alleged by the Respondents.

The Respondents have not produced any evidence whatsoever of or anv
B:

receipt showing this alleged payment.

Allotment of Shares:
(i)

There was no Employee Stock Option (ESOp) system in the company.

All shares were duly purchased and were not given as ESOp. The
petitioner did not receive preferential treatment or any gifts.

(ii)

R-3 never issued any shares to petitioner. On 1't March 2OOO, the
petitioner was issued 1305 shares against purchase by the then MD

of the Company (Col.V.K.Talwar) who is not related to the petitioner.

':'.
. rt-* ;r

1l -

Subsequently, on 10th February, 2002, the petitioner duly purchased

2349 shares from R-3.

(iii)

The petitioner has submitted comprehensive documentary evidence

in the form of statutory returns of the company obtained from the

Roc, to show that the Respondents conducted unauthorized share

allotment and transfer without hording any shareholders, meeting
and Board meeting and in comprete vioration of Articre 9 of the
Articles of Association of the company.
C:

(i)

Petitioner ceased day-to-day employment in the company on 30th

June' 2007 and thereafter, petitioner continued as Director of the
company.

(ii)
(iii)

(iv)

(v)
(vi)

Petitioner received sarary dues for day-to-day emproyment in the

company till 30th June, 2007 and duly signed a receipt for the same.
After 30th June, 2007, petitioner continued as Director of the
company and there is ample documentary evidence on record in
support of this fact. petitioner as Director attended AGM

on
29.9.2007 and submitted Form-32 to ROC in May, 200g.
The company as per provisions of Article 2O(b) of the Articles of
Association continued to pay Directorship perks to the petitioner
till
November, 2009.

Petitioner's emair dated 12th Aprir, 2007 is redundant to the present

petitioner as it was superseded by the events that foilowed
after
April-2007.
The alleged resignation letter dated 11th August, 20Og with ,,Sd/:,

an outright forgery as the petitioner never submitted any

(vii)

{viii)

i,

such

resignation letter to any person,

Respondents submitted another forged retter dated 11th August,
2008 to the cLB which is compretery differed from the retter they
earlier submitted to the Registrar of Companies.
In Mis
ication No.299/2OtL dated 31.5.2011., Gurgoan police in
closure report dated 3'd May, 2011 has clearlv stated that no

theft took place in the company, no document was stolen and that
the theft complaint against the petitioner was farse. This indicates
that the alleged signed resignation letter dated 11th August, 200g is
(ix)

still in possession of the Respondent company.

Despite Order dated 27rh Aprll, 2011 by the Hon,ble Board,
the
Respondents have failed to produce alleged signed resignation
letter
dated 11.8.2008.

The petitioner advocate has cited the case of Incablenet rhirupathi

(p) ttd,
wherein cLB Principal Bench held that it is well settled that the transfer
of shares
is liable to be set aside for non-compriance with the procedure contemprated
under the articles of association in regard to the transfer form. rf
the instrument
is not properly executed or the stamp affixed to the instrument
is not effectively

cancelled before execution or at reast at the time of execution,

the said
instrument must be deemed to be unstamped and therefore, the rodging
of such
an instrument with the company was not within the meaning
of section 1og(1) of
the Act.

with

regard to allotment of shares, the petitioner advocate mentioned

the
case of Eurasion choice International (p) ttd. and others wherein
cLB, principal

Bench, New Deihi has observed that it is settled law that while issuing
further
shares the Board of Directors discharge their fiduciary responsibilities.
lf the
shares are issued with the sole object of creating a new majority
or with the view
to convert a majority into a minority then the action of the Board is not onry in
breach of the fiduciary responsibilities but also a grave act of oppression
against

the existing. Further, while it is the prerogative of the Board to allot shares,
the
power should be exercised in the interest of the company
and not for any ulterior
purpose. rn another case of Udhayam Leasings and Investments (p)
Ltd. and
others, CLB, Additional principal Bench, chennai helci that it is well
settled that
the directors are in a fiduciary position vis-d-vis the company and must
exercise
their power with utmost good faith for the benefit as well as interest of the
company and exercise fair play in action in corporate management
and fufiher
must act bona fide in further allotment of shares. Though it is the prerogative
of
the board to allot shares, it is not that law has given absolute liberty to the

,.,

",4.\
8,;

- t3 directors at private limited companies to deal with their shareholders in any

manner as they wish. with regard to the issue of additional shares, the
responsibility of the directors towards the members becomes more onerous in a
private company. 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 private limited companies
are expected to make a disclosure to the shareholders of such a company wnen
further shares are being issued. Any issue of shares solely to gain control over
the
company is not permissible.
Even in the case of Dale & carrington lnvestment (p) Ltd. vs.p.K.prathapan

and others, Hon'bre supreme court herd that private rimited companies
are
normally closely held. This brings in considerations akin to those
applied in cases
of partnership where partners owe a duty to act with utmost good faith
towards
each other. Acts of directors in such a company are required
to be listed on a
much finer scale in order to rure out misuse of power for personar gains
or
ulterior motives. Though sec.g1 does not appry, due to the fiduciary
duty, owed
to issue shares for a proper purpose. The directors in a private rimiteo
company

to make a disclosure to shareholders in respect of issue of further

shares. Even though the pre-emptive common raw right of a sharehorder
to
are expected

'

participate in further issue of shares cannot be found

for sure in India in light of
Section 81, the test to be appried to see whether shares
were issued bona fide
and for the benefit of the company, would import
such considerations in case of
private limited companies under Indian Law.
The existence of right to issue
snares to one Director may technicaily be there,
but the question whether the
right has been exercised bona fide and in the interests
of the company has to be
considered on the facts of each case and if it is found
that it is not so. such
allotment is liable to be set aside.

6.

The Respondent advocate has arso furnished argument

on the major three
issues as under:-

---tq(A)

Transfer of Shares:

The Respondent Advocate argued that the petitioner has admitted that
with regard to 2349 shares, he has signed Transfer Deeds. Further, the petitioner
was aware of transfer of 2349 equity shares in the month of october, 2006 and
there is no prayer in the Petition for rectification of the Register of Members.
Further, the Respondent Advocate submitted that the petitioner himself has
sought to explain the delay by stating that he had written letters and that the
company had not addressed his grievances. In this regard, the petitioner has
claimed to have sent the following letters:-

(a) Letter dated 5.11.2006- being Annexure p-r4 at page 201- ofthe petition.
(b) Letter dated 15.1.2008, being Annexure p-r7 atpage2oT ofthe petition.
(c) Letter dated 20th March, 2008, being Annexure p-19 at page 213 of the
Petition.

Respondent Advocate stated that all the three letters have been disputed
none of the letters have any responses and despite the respondent disputing the

letter, the Petitioner has been unable to show the mode of service and having
failed to prove the letter in any manner the same are liable to be rejected out
rightly. However, in any view, the letters written by the petitioner do not extend
limitation in its favour as limitation can only be extended by acknowledgement.
There being no acknowledgement of the Respondent, the claim of the petitioner
is barred by limitation.

(B)

Allotment of Shares:

The Petitioner has no right

to

assail

the allotment of shares at the

discretion of the Board of Directors as per Article 6 of the Article of Association of

the Company. The Petitioner also could not claim anV entitlement as Section 81

of the Companies Act, 1956 does not apply to the Respondent Company and
more importantly it has been past practice of the Company not to offer share on
right basis, which is evident from the fact that the petitioner himself was o{fered
1,305 shares vide letter dated 1.3.2000 without offering the said shares to the

-tJ-

other shareholders. The Petitioner's contention that further allotment was

required to be done on right basis is misconceived and liable to be rejected. lt is
also relevant to state that additional allotment of shares was done for bona fide
need of the Company as was required by the Rajasthan Financial Corporation.
Second schedule to the Loan Agreement (Clause 1) clearly states that ,,the

company shall have raised its paid up and subscribed capital to the extent of
Rs.34.21 lakhs and IFUL Rs.11 lakhs before first disbursement of |oan.........,,Thus,
even the need for capital of the company cannot be disputed as the company
was implementing the project for setting up FMCG plant at Bhiwadi, Alwar, and
Rajasthan. The Petitioner is seeking to object to the loan agreement being placed

on record. However,

it

is submitted that the said evidence relate to financial

institution and its authenticity obviously cannot be doubted.

The Petitioner has made various grievances regarding certain errors in the
compliance certificate. Hon'ble supreme court of India in the case of ,,Needle

Industries (lndia) Holding Ltd. & ors." 1981 (51) company cases 743 at pages
777-782 has held that "technically illegal decision do not constitute oppression or
warrant the remedy under section 397 & 399. The Hon'ble court further held
that it is not enough to show any illegality. lt must further be shown that the
conduct of the majority shareholders was oppressive to the minority as memoers
and this requires that events have to be considered not in isolation but as a oart
of consecutive story. There must be continuous acts on the part of the majority
shareholders, continuing up to the date of petition, showing that the affairs of the

company were being conducted in a manner oppressive to some part of the

members. The conduct must be burdensome, harsh and wrongful and mere lack
of confidence between the majority shareholders and the minority shareholders
would not be enough unless the lack of confidence springs from oppression of a
minority by a majority in the management of the company's affairs, and sucn
oppression must involve at least an element of lack of probity or far dealing to
member in the matter of his proprietary rights as a shareholders.

The Petitioner had in fact severed his relations with the Respondent
company as he was keen to start his own company and had incorporated the

- t4 Company by the name of "Reefknot Management private Ltd" The Memoranoum

of Association also indicate that the object of the company include main object of

rule/quality management (Object N.1), which is similar to the business being

conducted by the Company. Thus, effectively the Petitioner wanted to start
parallel business to the Respondent company and thus cannot obviously continue
in the Respondent Company being placed as a competitor.

(C)

Resisnation from the Directorship:-

The Respondent Advocate submitted that the record of the company

indicate the letter of resignation which had word "Sd/-"which had been uploaded
with record of ROC. The said letter of resignation is contended to be forged as

the original letter dated 11.8.2008 bearing actual signature of the petitioner is not
available on record. Further, Respondent Advocate argued that the petitioner

had resigned from the company and his letter of resignation dated 5.3.2007 is
already on record wherein the petitioner expressly states that he would not be
working for M/s.EFN and further enquired to know whether he would continue as
a Director which is being argued on behalf of the petitioner that the said letter
was only for resignation as an employee and not as a Director. In response to the
letter, the petitioner was requested to continue for further period from t.4.2O07
to 30th June, 2007. Admittedly, the request for him to continue till 30th June, 2007
was accepted and this is also clearly evidenced by clearance of his dues, for full
and final settlement to show the vouchers. Letter dated 12th April, 2007 filed by
the Respondents as annexure to Application dated 27.3.2072 also leaves no room
for any doubt that the petitioner wanted to severe his connection with the
company and which he indisputably did as there has been no correspondence and
no interaction between the Petitioner and the company for at least past three
years prior to filing of the petition. A person's claim to be a Director of the
company must effectively show that he did take action as a Director. lt can hardly
be expected that a person who is a Director would not attend any Board meeting
nor take any action and yet conveniently file a petition as later claiming himself to
be a Director.

_,

- t7 The Resoondent advocate further stated that in Dr.Mrs.Nirmal Thakkar Vs.

Blue Bird Enterprises (2oL2l L72 Company cases 28 (CtB), the Hon'be court held
that there was no formal meeting and even assuming that no notices were sent
and there was no reliable proof of service and that the leave of action should be
normally given to a Director. The Hon'ble Board stated that the removal of the

Petitioner in that case under Section 2S3(iXg) was not correct, but nonetheless
proceeded to hold that just an equitable provision did not entitle the petition to
disregard the obligation, she had agreed to when entering the Company and the
Petitioner being Director, being a business person should have aware of the
statutory provision of holding Board Meeting and General Body Meeting and she
should have insisted on that and the Court cannot dispense her from it' Thus,
although the Court in the present case agreed that the Petitioner Company's
affairs were being conducted in a manner which was not legal i.e. no notices were
being sent, no meetings were being held and there was further issue of capital to
the majority shareholders. The Hon'ble Court nonetheless proceeded to decline

the relief to the Petitioner with regard to further allotment of shares as it was
held that the Petitioner had not been diligent and had failed to discharge her
obligation as a Director and thus abandoned the company and cannot complain of
being excluded.

6.

With regard to the issue of non-maintainability on account of limitation, it

is pertinent to mention that the plea of limitation is a mixed question of law and
fact. Unless it becomes apparent from a reading of the company petition that it is
barred by limitation, the petition could not be rejected under Order 7, rule 11-(d)
of the Coe of Civil Procedure, 1908. The Company Law Board is not a Court for
the purpose of Limitation Act, 1953 and the limitation under Article 137 of the
Limitation Act, 1963 does not apply to proceedings before the Board. Delay and
laches apply and start from the date of knowledge. As per the petitioner, the
petitioner held 4964 equity shares amounting to 45.t3% of the issued and
subscribed share capital of the company and due to illegal acts of the Respondent
. challenged in the Petition, the holding of the petitioner has been illegally diluted
and in terms of annual return for the year 2009-10, the petitioner is found to hold
a total number of 2615 equity shares amounting to7.640/o of the subscribed and

-,Rpaid up capital. The company being a private and family ownedrthe issues of

dilution of the shareholding and removal of directorship would have been

deliberated for amicable settlement. Furtherrthe resoondent filed annual return
as on 30th September, 2009 belatedly in june, 20L0 and thereby,the petitioner
could get certified copy of records from ROC in 2011 and the fact about dilution of
the shareholding came to his notice when he examined these certified copies of

documents. The petition was filed on 24tn February,2OtI and hence.there appeari
no inordinate delay in filing the petition. Moreover, there were three members
including the petitioner in the company at the time when the petitioner held 4954

equity shares. Hence, the petitioner was more than one tenth of the total
number of members of the company. In view of this, the petition is considered to
be maintainable.

7.

I have gone through the allegations leveled in Company petition, reply filed

by the respondents, rejoinder submitted by the petitioner, arguments and case

laws cited by advocates of both the sides i.e. petitioner and respondents. Having
perused the correspondence and documents placed on record, it is observed that

the petitioner resigned as employee in March, 2007 and took money as final
settlement of the employment of the company. However, the petitioner
attended Annual General Meeting held on 29th September,2OOT as Director and
submitted Form-32 to ROC in May, 2008. Further, as per the provisions of Article
20(b) of the Articles of Association, the company paid perks to the petitioner as
Director till November, 2009. Even, the respondents have admitted that the
petitioner was continuing as Director till August, 2008. The resignation letter
dated 11th August, 2008 is not signed by the petitioner. On the contrary, the word

"Sd/-" has been typed in place of signature. The original letter of resignation
dated 11st August,2008 with full signature could not be produced by the
respondents. In view of this, Form-32 filed with ROC for removal of the petitioner
as Director does not carry legal support of documents such as duly signed letter of
resignation and also.racceptance of resignation by the Board of Directors through
passing necessary resolution. Under these circumstances, there appear-6
oppression against the petitioner as he was illegally removed from the
Directorship.

._t?_
In regard to the transfer and allotment of shares, Article 9 of the Articles of

Association is very relevant as Section 81 of the Companies Act is not applicable

to the respondents, being a private limited company. As per Article 9, no transfer
of shares shall be registered unless a proper instrument of transfer duly stamped

and executed by or on behalf of the transferer and by or on behalf of the

transferee has been delivered to the company together with the certificate or if
no such certificate is in existence, the letter of allotment of the shares. Each
signature to such transfer shall be duly attested by the signature, of one credible
witness who shall add his address and occupation. Further, issue of shares shall
first be made to the existing shareholders and only on their refusal, the shares will
be issued to the outsiders. The alleged illegal transfer of 2349 shares need to be
examined in the context of the aforesaid Article 9 of the Articles of Association
and Section 108 of the Companies Act, 1956.. As per annual return, made on 30th
September, 2006, 2349 shares of the petitioner were transferred on 31't March,
2006 wherein the respondents could not produce any Transfer Deeds on the date
or before 31" March, 2006 for the transfer of shares. This indicates that the said
transfer of shares was not duly supported by the legal documents of Transfer
Deed and the Share Certificates in original. This is evidenced from the petition
that the respondenis after 4 months obtained signed Transfer Deed from the
petitioner on the pretext of collateral for loan and.,the signed Transfer Deed dated
1't August, 2006 is not regis!,ered and the revenue stamps are not cancelled. Over
and above, the respondentil?& produced any evidence or any receipt showing
the payment as consideration for these shares. Thus, the transfer of 2349 shares
of the petitioner in favour of Respondent No.3 does not fulfill the requirement of
Article 9 of the Articles of Association and also the orovisions of Section L08 of
the Companies Act, 1956.
So far

the allotment of further shares are concerned, it is seen that the

petitioner list with the following allotment of shares:-

(i)

On 31't March, 2006, 5OO0 equity shares were allotted to Respondent

No.3 (Shri Mahender Kumar Saxena);

.-zoOn 20'n March, 2007, L000 equity shares were allotted to R-7 (Shri Uday

(ii)

Chawla);
(iii

On 23'd December, 2008, t7,zt} equity shares were issued at par to R-2
(Shri Munish Kumar Saxena).

With regard to the aforesaid allotment of shares, there appear technical

lapses of not passing requisite resolution and absence of offer to existing
shareholders. The Respondent Company is a private limited company and
therefore, reliance may be laid on the observation and dec&ion of Hon'ble
Supreme Court in the case of Dale & Carrin6on Investment (P) Ltd. Vs.
P.K.Prathapan and Ors. In this case, it was viewed that the Directors in a private
limited company are expected to make a disclosure to the shareholders in respect
of issue of further shares. Even though the pre-emptive common law right of a
shareholder to participate in further issue of shares cannot be found for sure in
India in light of Section 81, the test to be applied to see whether shares were
issued bona-fide and for the benefit of the company, would import such
considerations in case of private limited companies under Indian Law. The
existence of right to issue shares to one Director may technically be there, but the
question whetherthe right has been exercised bona-fide and in the interest ofthe
company has to be considered on the facts of each case and if it is found that it is
not so, such allotment is liable to be set aside. Further, another case of Eurasion
Choice Internatioanl (P) Ltd. and Others is also important to be mentioned. ln
this case, it was also observed that if the shares are issued with the sole object of

creating a new majority or with the view to convert a majority into a minority,
then the action of the Board is not only in breach of the fiduciary responsibilities
but also a grave act of oppression against the excising. While it is prerogative of
the Board to allot shares, the power should be exercised in the interest of the
company and not for any ulterior purpose. ln the instant case, the company was
required to borrow money from Rajasthan Financial Corporation to meet its
business requirements and the company was required

to

increase the paid up

to meet the condition as stipulated in the loan agreement. Further, the

allotments were made to existing shareholders and outsiders in the interest of

capital

the company and thereby, no new majority could be created.

- -7." -

Elb
In view of the foregoing,

it is held that-

the petitioner is declared as illegal and thereby, the petitioner is

restored as Director in the company and Form-32 filed with Roc for his
removal as director be treated as null and void,
(b)Transfer of 2349 shares of the petitioner to R-3 is hereby declared as null
and void and annual return showing such transfer of shares be treated as
(a) Removal of

null and void.

(c) Allotments

of shares made by the company as alleged in the petition are

declared legal and valid.

The Company Petition and CA, if any, are disposed of accordingly. Interim
Stay, if any, is hereby vacated. No Order as to cost.

--t.

//"

MEMBER

Place: New Delhi

Dated: 18-01-2013

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