GIRDHAR GOPAL GUPTA AND ORS.versusAAR GEE BOARD MILLS PVT. LTD. AND ORS.

                             (2009] 1 S.C.R. 711


                   GIRDHAR GOPAL GUPTA AND ORS.                         A
                                      v.
             MR GEE BOARD MILLS PVT. LTD. AND ORS.
                   (Civil Appeal No. 601 of 2009)

                            FEBRUARY 2, 2009
                                                                        B
              [DR. ARIJIT PASAYAT, P. SATHASIVAM AND
                           AFTAB ALAM, JJ.]

             COMPANIES ACT, 1956:
                                                                        c
              ss. 397 and 398 - Allegations of oppression and
        mismanagement, illegal allotment of equity shares resulting
        in conversion of majority shareholding into minority
        shareholding, appointment of Additional Director and removal
        of two Directors - Company Law Board holding allotment of D
_..,_   5564 shares out of 9507 shares as illegal and giving benefit
        of doubt as regards allotment of 3943 shares as it was within
        the knowledge of petitioners, and holding appointment of
        Additional Director and removal of two Directors illegal and
        in favour of petitioners - Appeal by petitioners as regards
                                                                         E
        allotment of 3943 shares - HELD: There being some factual
        controversies as regards petitioners ratifying the Balance
        Sheet and their representing before authorities including
        sales tax and income tax authorities, which clearly rule out
        the possibility of petitioners being unaware of the situation -
                                                                         F
        Considering the nature of controversy it is not a fit case where
        any interference under Article 136 of the Constitution is called
        for - Constitution of India, 1950 - Article 136.

            Respondent no. 1-Company was incorporated as a
        private limited company in which shareholdings of the           G
        group led by appellant no. 1 was 50.9% and that of the
  ~     group led by respondent no. 2 was 49.1%. The company
        purchased a sick unit from UPFC in the year 1985
        alongwith its land admeasuring 7215 sq. yards in the
                                     711                                H
    712        SUPREME COURT REPORTS          [2009] 1 S.C.R.


A Industrial Area of the city. Later the unit was closed.
  Thereafter disputes arose between the parties and the
  matter was referred for arbitration. Awards were given, but
   no steps were taken to make the awards rule of the court.
  On 20.8.1998 the respondent no. 2 group filed return
B before the Registrar of Companies showing about the
  allotment of 9507 equity shares of Rs.100/- each to have
  been made in their favour in the years 1994 and 1995. With
  the said allotment of shares shareholding of the appellant
  group came down to 13.4% and that of the respondent
c group rose to 86.6%. The appellant group filed a petition
  u/ss 397 and 398 of the Companies Act, 1956 before the
  Company Law Board alleging oppression and
  mismanagement on the part of respondent group for
  illegal allotment of 9507 equity shares, appointment of an
0 Additional Director w.e.f. 20.10.1994 at the instance of
  respondent group and removal of two Directors of the
  appellant group from 16.9.1998. The Company Law Board
  held that the allotment of 5564 shares out of 9507 equity
  shares, was illegal and set aside the same. As regards the
  remaining 3943 shares, benefit of doubt was given to
E respondent group on the ground that this allotment was
  within the knowledge of the appellant group. The Board
  further declared appointment of Additional Director and
  removal of two Directors as illegal. Both the parties filed
  appeals, which were dismissed by the High Court.
F
       In the instant appeal, it was contended for the
  appellants that allotment of shares could only be done
  by the Board of Directors and there was no presumption
  in law of allotment of shares merely because of receipt
G of share application money; that by allotment of 3943
  shares the appellants' majority shareholding from 50.9%
  was reduced to 23.5% and as such, the converting of
  majority shares to minority shares was a continuous
  oppression.
H
             GIRDHAR GOPAL GUPTA AND ORS. v. AAR GEE              713
                  BOARD MILLS PVT. LTD. AND ORS.

-~            Dismissing the appeal, the Court                          A

              HELD: It is true that the allotment of shares is
         different from receipt of share application money, but the
         conduct of the parties and their understanding of the
         situation largely determines the basic issue. There are        B
         some factual controversies, namely, the effect of the
         appellants ratifying the Balance Sheet, their appearing
.....    before the Sales Tax Authorities and the undisputed
         position with respect to share application money as
         reflected in the financial statements. It is difficult to
         believe that even though the conversion of the share
                                                                        c
         application money was done in June 1994, October, 1994
         and January 1995, it was not in the knowledge of the
         appellants. The fact that the appellants were representing
         the company before various authorities including the
......   Sales Tax Authorities and Income Tax Authorities clearly       D
         rules out the possibility of the appellants being unaware
         of the situation. Considering the nature of the
         controversy, it is not a fit case where any interference
         under Article 136 of the Constitution is called for. [Para
         19 and 20] [722-D-G]                                           E

              CIVIL APPELLATE JURISDICTION: Civil Appeal No. 601
         of 2009.

             From the final Judgment and Order dated 22.11.2005 of
                                                                        F
         the High Court of Delhi at New Delhi in LPA Nos. 1917-22 of
         2005.

               U.K. Chaudhary, Saurabh, Vikam Mehta and Vikas Mehta
         for the Appellants.
                                                                        G
             R. Venkataramani, Vinay Kumar Garg, V. Vijaya Lakshmi,
,;)I.
         Aljo Joseph and Brijesh Kr. Gupta for the Respondents.

             The Judgment of the Court was delivered by

             DR. ARIJIT PASAYAT, J.1. Leave granted.                    H
    714          SUPREME COURT REPORTS              [2009] 1 S.C.R.


A        2. Challenge in this appeal is to the judgment of a Division
    Bench of the Delhi High Court dismissing the appeal filed by
    the appellants as not maintainable. Challenge in the appeal was
    to the judgment of a learned Single Judge of High Court. Two
    appeals were disposed of by a common order dated 7.2.2005.
B
          3. Background facts in a nutshell are as follows:

        M/s Aar Gee Board Mills was incorporated as private             •
  limited company in which two groups hold the shares. One
  group is led by Girdhar Gopal Gupta (hereinafter referred to as
c 'Gupta Group') and other by Guru Charan Dass (hereinafter
  referred to as 'Garg Group'). The company was incorporated
  with authorized share capital of Rs.20 lacs (20,000 equity
  shares of Rs.100/- each). At the time of incorporation, the Gupta
  Group subscribed 1722 equity shares and the Garg Group was
D allotted 1662 equity shares. The shareholding between the two         ...
  groups was accordingly in the ratio of 50.9% : 49.1 %. This
  company purchased a sick unit from UPFC in the year 1985
  consisting of land at GT Road Industrial Area Ghaziabad
  measuring 7215 sq. yards along with the plant and machinery.
E The company operated the aforesaid unit for few years after
  its purchase. However, in October 1994 this unit had to be
  closed down. Reasons were stated to be non-installation of
  water treatment plant for pollution control and non payment of
  Government dues. Both the groups alleged non cooperation
F and mis-management against each other.
        After the closure of the aforesaid unit, disputes arose
  between the parties. Both the parties referred the matter for
  arbitration. Three arbitrators were appointed who gave their
  awards. In the final award given on 18th April, 1998 the
G arbitrators inter-alia concluded that the aforesaid unit should be
  divided equally between the two groups. There is some dispute         ,.¥;

  about the terms of reference to the aforesaid arbitrators. Fact
  remains that although proceedings before the said arbitrators
  were initiated under the Arbitration Act, 1940 and, therefore,
H awards were required to be made rule of the Court, but no steps
              GIRDHAR GOPAL GUPTA AND ORS. v. AAR GEE BOARD 715
•              MILLS PVT. LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]

              were taken in this behalf by either of the groups.                    A
    -..,..
                   On 20th August, 1998, Garg Group filed the return with the
              Registrar of Companies informing the Registrar of Companies
              about the allotment of 9507 equity shares of Rs.100/- each
              which was allotted in favour of the members of the Garg Group.
                                                                                    B
              It was stated that these allotments were made in the years 1994


    ..        and 1995 .

                   With the allotment of aforesaid shares in favour of the family

-             members of the Garg group the shareholding pattern changed
              drastically. The shareholding of the Gupta Group which was
              hitherto to the extent of 50.9% came down to 13.4% and that
                                                                                    c
              of the Garg Group rose to 86.6%.

                   Aggrieved by this and some other acts on the part of the
              Garg Group, Gupta Group filed CP.65/2001 under Sections 397           D
      _....   and 398 of the Companies Act, 1956 (in short the 'Act') before
              the Company Law Board (for short the 'Board') alleging
              oppression and mis-management on the part of the Garg
              Group. Three acts of oppression and mis-management were
              highlighted which are as under:
                                                                                    E
                  (a) Illegal allotment of 9507 equity shares as noted above.

                  (b) Appointment of Mr. Parmanand, brother of Mr. Guru
                  Charan Dass Garg as the Additional Director with effect
                  from 20th October, 1994, return in respect of which was           F
                  also filed with the Registrar of Companies on 20th August,
                  1998.

                  (c) Removal of Mr. Girdhar Gopal Gupta and Mr. Ram
                  Narain Gupta as directors from the company on 16th
                  September, 1998 without notice of any Board meeting.              G

         -~       The Board decided this petition vide order dated 25th
              March, 2004. As far as issue of allotment of shares is
              concerned, the Board opined that allotment of 5564 shares to
              the Garg group was illegal and set aside the same. In so far          H
    716           SUPREME COURT REPORTS              [2009] 1 S.C.R.


A   as allotment of 3943 shares is concerned, benefit of doubt was       _,...
    given to the Garg Group on the ground that this allotment was
    within the knowledge of the Gupta Group.

         On the two counts, this petition was decided in favour of
    the Gupta Group as it is held that appointment of Mr. Parmanand
8
    as Additional Director was invalid. Likewise, removal of Mr.
    Girdhar Gopal Gupta and Mr. Ram Narain Gupta as directors
    was also held to be illegal.                                         ...
          The Gupta group has preferred Co.A.(SB) No.9/2004
c against that portion of the Order whereby allotment of 3943
  shares is not disturbed. The Garg Group on the other hand, filed
  Co.A.(SB) No.11/2004 in respect of other findings which were
  returned in favour of the Gupta group. That is how these
  appeals wee heard together and were disposed of by a
D common Order.                                                          -;.

        In so far as issue of allotment of shares is concerned,
    Board in para 12 held as follows:

          ''The last point for consideration is the allotment of 9507
E         equity shares which have been allotted on 25.6.1994,
          20.10.1994, 9.1.1995. The respondents have failed to
          produce notice/minutes of the board meeting in which
          9507 shares were allotted. The return of allotment of shares
          in Form No. 2 has been filed in one lot on 20.8.1998 with
F         the ROC after a delay of 4 years. The respondents have
          submitted that in the balance sheet signed of 1993-94 by
          the petitioner indicated application money of Rs.3,94,320
          and accordingly the petitioners were aware of allotment of
          9507 shares. It is true that a sum of Rs. 3,94, 320/- has
G         been shown in the balance sheet of 1993-94 which the
          respondents have allotted further shares of Rs.5,56,380 for
          which no explanation has been given. It is also not known      ~
                                                                                 •
          whether any money amount to Rs.5,56,380/- was ever
          received by the company and how the same has been
H         utilized in the company which was closed down in 1995."
             GIRDHAR GOPAL GUPTA AND ORS. v. AAR GEE BOARD 717
              MILLS PVT. LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]

    ~             The High Court noted that the Board recorded a                  A
             categorical finding that the respondents in the petition i.e. Garg
•            Group had failed to produce notice/minutes of the Board
             meeting in which 9507 shares were allotted. It was also
             recorded that although these shares were allotted in two lots
             in 1994 and 1995, return of allotment of these shares was            B
             filed in one lot on 20th August, 1998 with the Registrar of
             Companies after a delay of 4 years. However, the allotment of
    -+·      shares _to the extent of 3943 shares only was distributed on the
             ground that the Gupta Group would have the knowledge much
             earlier but it was not challenged earlier. Accordingly, the Board    c
             declared the allotment of 5564 shares as illegal and the same
             was set aside. Learned Single Judge first referred to this
             aspect. He noted that the Garg Group had failed to produce
             any notice or minutes of the Board meetings regarding allotment
             of shares.
    _...                                                                          D
                  4. Learned counsel appearing for the Garg Group did not
             dispute this position before the learned Single Judge at the
             time of arguments. His only argument was that the records of
             the company were in possession of the Gupta Group and
             therefore his client could not produce the records to the            E
             aforesaid effect.

                   5. Learned Single Judge noted that there was some
     ..I.    controversy about the possession of company's records .
             Though learned counsel appearing for the Gupta Group                 F
             referred to the final award of Arbitrators wherein it has been
             recorded that some records were in possession of the Garg
             Group, yet the High Court did not go into this aspect because
             the categorical submission of Gupta Group in the petition was
             that there was no notice of allotment of shares and there was
                                                                                  G
             no decision of the Board of Directors to allot the shares. The
      _).,   allegations were not traversed by the Garg Group in their reply
             filed. The High Court noted that the respondents never came
             out with a case that there was no such notice for allotment of
             shares given to the existing shareholders or there was any such
                                                                                  H
    718         SUPREME COURT REPORTS             (2009] 1 S.C.R.


A decision taken by the Board of Directors for allotment of          ~
  shares. That part of the Board's order was therefore confirmed.

        6. The residual issue was the balance 3943 shares. Here
  again, a categorical finding recorded was that there was no
  notice or Board's decision for allotment of shares. However,
B
  benefit of doubt was given as share application money was
   reflected in the Balance Sheet of the company as on
   31.3.1994. It indicated share application money of Rs. 3,94,
  320/-. The original Balance Sheet was produced which shows
                                                                     .
  that it bears the signature of Mr. Girdhar Gopal Gupta as well
c as Mr. Guru Charan Dass Garg. The Board from the aforesaid
  entry in the Balance Sheet came to conclude that allotment of
  these shares were within the knowledge of Gupta Group. The
  High Court held that such knowledge cannot be ruled out. It
   was inferred that Gupta Group had information about the
D allotment of shares in the year 1994 and challenge was made        "'--
  only in the year 2001. Accordingly, it was held that the view
  taken by the Board was plausible and possible view and the
  interference was not called for.

E      7. So far as the question relating to removal of two
  Directors of Gupta Group and induction of Directors of Garg
  Group is concerned, the High Court did not interfere with the
  decision of the Board. It was felt that it was an academic
  exercise as admittedly the company was not functioning since
F 1993 and the only aspect relevant for the purpose would be
  the distribution of assets of the company.

        8. Learned counsel for the appellant submitted that
  allotment of shares could only be done by the Board of
  Directors and there is no presumption in law of allotment of
G shares merely because of receipt of share application money.
  It is pointed out that benefit of doubt had been given to the
  respondents to the extent of 3943 shares as a result of which
  the appellants who had a slight majority of shareholding of 50.9
  % have been reduced to 23.5% and the responderi~::; who
H originally held 49.1 % shares have been increased to 76.5%.
        GIRDHAR GOPAL GUPTA AND ORS. v. MR GEE BOARD 719
         MILLS PVT. LTD. AND ORS. [DR. ARIJIT PASAYAT, J.)

             9. Reference is made to Article 8 of the Articles of the     A
        Company which shows that the shares have to be under the
        control of the Board and the Board has the power to allot or
        dispose of the same. The same reads as follows:

                   "The shares be under the control of the Board who
                                                                          B
             may allot or otherwise dispose of the same to such persons
             on such terms and conditions and at such time as the
             Board may think fit but subject to the Articles herein
             contained and also to the restrictions mentioned in the
             foregoing clause 2 hereof."
                                                                          c
              10. The concurrent finding is that no notice of the Board
         meeting was given and no Board's meeting was held in respect
        of allotment of shares. The said finding has not been under
         challenge by the respondents and it has become final. It is,
_,.     therefore, submitted that two different yardsticks cannot be D
        applied for 5564 shares and 3943 shares. In essence, it is
        submitted that the courts below have erred in giving benefit of
        doubt in respect of 3943 shares merely because a sum of
        Rs.3,94,320/- were shown as share application money in the
        Balance Sheet as on 31.3.1994. It is submitted that records are E
        not in possession of the appellants and have been categorically
        found to be in possession of the respondents. It is also
        submitted that the approach under Sections 397 and 398 of the
 ,,,(   Act was not belated. Oppression in converting majority shares
        to minority shares is continuous one and, therefore, there is F
        continuous oppression. It is stated that the appellants learnt
        about the ostensible issue of shares by the respondents only
        when they carried out the inspection with the Registrar of
        Companies in the year 2000. Appellants sent a letter on
        3.4.2000 to the respondents intimating about the issuance of
                                                                        G
        shares. Since there was no satisfactory reply, petition under
        sections 397 and 398 of the Act was filed.

            11. So far as the receipt of share application money is
        concerned the Balance Sheet only shows that it was under the
        head of 'share application money' and there was no allotment.     H
    720         SUPREME COURT REPORTS              (2009] 1 S.C.R.


A        12. In response, learned counsel for the respondents
  submitted that the case of the appellants before the Board was
  that the respondents have raised the share capital of
  Rs.3,94,320/- by allotting 3943 shares at Rs.100/- each on
  25.6.1994, 20.10.1994 and 9.1.1995 without issuing notice of
B such meetings to the appellants. It is pointed out that admittedly
  the meetings were held at the registered office of the company
  i.e. the residence of the appellants and as such allotments made
  by the respondents lead to an act of oppression under Section
  398 of the Act. It is pointed out that the totally a new case is
c presented before this Court that no meeting for allotment of
  alleged equity shares were ever held and the share application
  money reflected in the Balance Sheet ending on 31.3.1994
  cannot be converted into share capital and therefore the
  allotment is bad under Section 286 of the Act admittedly, when
  the quorum of Directors was duly empowered to do so.
0
  Moreover, both the Directors were signatories of the
  Memorandum and Articles of Association of the Company. It
  is pointed out that undisputed facts are as under:

        13. The registered office of respondents 1 and 2 was at
E 73, Gujarawala Town, Part-II, G.T. Kamal Road, Delhi which is
  the residence of the appellants. All the Board's meetings were
  held and resolutions therein were passed at the same
  registered office. Moreover, all the statutory records were kept
  at the registered office as mandated by Sections 193, 196(1 ),
F 303 (1), 307(5) and 209 of the Act. The company was passing
  through financial crises and there was need to meet the
  government dues and installation of an effluent treatment plant
  in view of the directions of this Court. The quorum under the
  Articles of Association was two Directors as per Clause 33 of
G the Article of Association. Two persons were present in the
  meeting. The Board of Directors allotted 3943 equity shares
  when the requisite quorum of two Directors of the respondent
  group was there. In the meetings held on 25.6.1994,
  20.10.1994 and 9.1.1995 at the registered office as per Clause
H 33 of the Articles of Association as well as under Section 287
 GIRDHAR GOPAL GUPTA AND ORS. v. AAR GEE BOARD 721
  MILLS PVT.LTD. AND ORS. [DR. ARIJIT PASAYAT, J.]

of the Act. Auditor was appointed under Section 224 and power        A
of attorney was signed by appellant No.1 on 4.9.1995 for which
meeting was held and Balance Sheet as on 31.3.1995 was
audited by the auditor on 4.9.1995 under Section 215 of the
Act. Significantly, no mala fides have been imputed on the part
of the auditor and no allegatioris of fraud or mala fide intention   B
were imputed upon the respondents before the Board, learned
Single Judge and not even before this Court.

     14. There is no dispute that the Balance Sheet as on
31.3.1994 was duly signed by appellant No.1 and share                C
application money amounting to Rs.3,94,320/-was reflected as
share application money in the Balance Sheet with mutual
understanding that the same was to be treated as share capital
in next financial year ending on 31.3.1995.

     15. To give effect to the understanding, the same was           D
converted on 25.6.1994, 20.10.1994 and 9.1.1995. Resolution
dated 21.4.1997 was passed and signed by appellant No.1
authorising respondent No.2 for getting sales tax and income
tax assessment completed. In the sales tax assessment
proceedings appellant No.1 was representing the company.             E
The Balance Sheet was filed at that time before the Assessing
authority. An order dated 16.6.1998 for the assessment year
1994-95 clearly disclosed that appellant No.1 had appeared
before the Sales Tax Authority on 3.6.1998 and produced
records of the company. Thus, the Balance Sheet of the               F
company as on 31.3.1995 was available with appellant No.1
and produced before the Sales Tax Authority. Therefore, the
claim of the ignorance of the records by the appellants is wrong.

     16. It is pointed out that because of rising prices of estates
of the company the petition under Sections 397 and 398 of the G
Act was filed on 20.10.2001. However, the returns for allotment
of 9507 shares including 3943 shares were filed before the •
Registrar of Companies on 20.8.1998.
     17. It is submitted that the plea relating to Section 286 is    H
    722          SUPREME COURT REPORTS                [2009] 1 S.C.R.


A not available in the present case as meeting admittedly held
  and the proof of service of notice was in the possession of the
  appellants as part of statutory record. Even after the meeting
  on 4.9.1995 wherein auditors were appointed the earlier
  meetings of the board are ratified and the appellants cannot
B question that. If the appellants' claim is accepted it is
  inconceivable as to how share application money shown has
  been utilized in the subsequent years and as to how they were
  reflected in the Balance Sheet.
        18. So far as the other submissions relating to records
C manipulations it is submitted that this is not a case where
  jurisdiction under Article 136 of the Constitution should be
  exercised.
        19. We find that there are some factual controversies, for
  example, the effect of the appellants ratifying the Balance
0
  Sheet, appearing before the Sales Tax Authorities and the
  undisputed position with respect to share application money as
  reflected in the financial statements. It is difficult to believe that
  even though the conversion of the share application money was
  done in June 1994, October, 1994 and January 1995, it was
E not in the knowledge of the appellants. The fact that the
  appellants were representing the company before various
  authorities including the Sales Tax Authorities and Income Tax
  Authority clearly rules out the possibility of appellants being
  unaware of the situation. It is true that the allotment of shares
F is different from receipt of share application money but the
  conduct of the parties and their understanding of the situation
  largely determines the basic issue.
       20. Considering the nature of the controversy we do not
G consider this to be a fit case where any interference under
  Article 136 of the Constitution is called for.
         21. The appeal is dismissed. There will be no order as to
    costs.

H R.P.                                            Appeal dismissed.