SUPREME
COURT OF
V. S. Krishnan
v.
Westfort Hi-Tech
Hospital Ltd.
Tarun chatterjee and p. sathasivam, jj
civil appeals NoS.1473 TO 1476 of 2008
February 21, 2008
Section 172, read with
section 53, of the Companies Act, 1956 - Meetings and proceedings - Contents
and manner of service of notice and person on whom it is to be served - Whether
where first petitioner was party to board meeting, wherein date, place and
agenda of AGM were fixed and further, respondents had produced certificates of
posting to establish service of notice of AGM on directors and other
shareholders, High Court was justified in rejecting compliant of petitioners
that they did not receive notice of AGM and holding that AGM was legal and it
was held with due notice - Held, yes
Section 81 of the Companies Act, 1956 - Share capital - Further issue of
- Whether right shares can be offered to outsiders without a special resolution
by 2/3rd majority shareholders - Held, no
Section 397, read with section
398, of the Companies Act, 1956 - Oppression and mismanagement - Appellants/
petitioners filed petition under sections 397 and 398 on account of series of
purported acts of oppression and mismanagement committed by respondents in
affairs of respondent-company - Main grounds took up by petitioners were that
they had invested huge sum in respondent-company on promise that they would be
permanent directors of company but they were illegally removed from office of
directors in AGM, and that issuance of further shares on right basis was illegal
- CLB allowed petition - On appeal, High Court, however, set aside order CLB to
a great extent - Whether since facts revealed that there was no specific
promise that petitioners would be given directorship permanently and besides,
there was full disclosure of provisions of retirement of one-third directors
annually by rotation, theory of ‘legitimate expectation’ had no application in
instant case and, therefore, removal of petitioners from directorship could not
be said to be an act of oppression - Held, yes - Whether since petitioners were
given right to subscribe to ‘right issue’ along with all others in same
proportion no prejudice had been caused to petitioners on accoiunt of issue of
right shares, Held, yes - Whether since other alleged acts of mismanagement
were related to period when petitioners were in board of company and in active
management, they could not press that point in petition under sections 397/398
- Held, yes - Whether in aforesaid circumstances, no case was made out under
sections 397 and 398 and, therefore, High Court rightly set aside order passed
by CLB - Held, yes
Respondent
No.2 and his family members established a hospital, which was subsequently
converted into a public limited company (respondent-company). The petitioners,
who were collectively holding in excess of ten per cent of the share capital of
the respondent-company, filed petition under section 397/398, alleging that
they were NRI doctors and had invested huge sum in the respondent-company on
the promise of respondent No. 2 that they would continue in the company as
permanent directors but that promise was not honoured and petitioner Nos. 1 to
4 and respondent Nos. 5 and 4, who were supporting petitioners, were removed
from directorship in the annual general meeting which was held without any
notice to the petitioners. In the petition the petitioners also challenged
issuance of right shares to public, issue of duplicate shares to ‘P’. The CLB
though held that there was oppression and mismanagement inasmuch as the meeting
held on 29-9-2005 was without proper notice, yet granted only partial relief by
declaring, inter alia, that the further issue of shares was illegal and
void ; that the election of the respondent Nos. 16 to 23 as directors was to be
set aside; that the retiring directors, i.e., the petitioner Nos. 1 to 4 and
the respondent Nos. 5 and 14 should be deemed to have been automatically
re-appointed as directors at the eleventh annual general meeting and should
continue till the date of the twelfth meeting; and that issue of duplicate
shares to ‘P’ and the transfer of shares by ‘P’ in favour of the respondent
Nos. 16 to 21 and others was invalid. On appeal, the High Court partly set
aside the decision of the CLB holding that the general body meeting was held with
valid notice ; that issuance of right shares needed no interference ; that the
CLB went wrong in setting aside the issue of duplicate shares to ‘P’ ; and that
re-appointment of the retired directors after the date fixed for annual general
body meeting was not correct. However, the High Court upheld the order of the
CLB in setting aside the election of eight directors (though for other reasons
- mainly for technical irregularity) and special resolution under section
81(1A) to issue right shares to the public.
On
appeal to the Supreme Court:
From
the several judgments of the Supreme Court, it is clear that the oppression
would be made out:
(a)
Where the conduct is harsh,
burdensome and wrong.
(b) Where the conduct is mala fide and is for a collateral purpose where although the
ultimate objective may be in the interest of the company, the immediate purpose
would result in an advantage for some shareholders vis-a-vis the others.
(c) The action is against probity and good
conduct.
(d) The oppressive act complained of may be
fully permissible under law, yet may be oppressive and, therefore, the test as
to whether an action is oppressive or not is not based on whether it is legally
permissible or not since even if legally permissible, if the action is otherwise
against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose,
it would amount to oppression under sections 397 and 398.
(e) Once conduct is found to be oppressive
under sections 397 and 398, the discretionary power given to the CLB under
section 402 to set right remedy or put an end to such oppression is very wide.
(f) As to what are facts which would give
rise to or constitute oppression is basically a question of fact and,
therefore, whether an act is oppressive or not is fundamentally/basically a
question of fact. [
Section
10F permits an appeal to the High Court from an order of the CLB only on a
question of law i.e., the CLB is the final authority on facts unless
such findings are perverse based on no evidence or are otherwise
arbitrary. Therefore, the jurisdiction
of the appellate court under section 10F is restricted to the question as to
whether on the facts, as noticed by the CLB and has been placed before it, an
inference could reasonably be arrived at that such conduct was against probity
and good conduct or was mala fide or
for a collateral purpose or was burdensome, harsh or wrongful. The only other
basis on which the appellate Court would interfere under section 10F is if such
conclusion is (a) against law or (b) arose from consideration of
irrelevant material or (c) omission to construe relevant materials. [
It
was the grievance of the petitioners/appellants that the respondent No. 2, in
spite of getting substantial money towards share capital did not fulfill the
promise made by him. On that aspect, the CLB, while accepting the stand of the
petitioners, had concluded that there was a 'legitimate expectation' in favour
of the petitioner Nos.1-4 for their continuance in the board of directors of
the company. [
The
issue of re-appointment of retired directors on the theory of 'legitimate
expectation' was considered by the High Court in detail. It was the stand of the respondent No.2 that
there was no specific promise that those petitioners would be given
directorship permanently. The materials
placed and discussed before the CLB showed that there was full disclosure of
retirement of one-third directors and election to that place was in accordance
with the Act and articles of association and theory of 'legitimate expectation'
had no application. It was also
highlighted before the CLB as well as the High Court that out of eight
directors elected, six were not related to chairman. It was asserted that chairman and his family
had given personal guarantee to Rs.21.99 crores, whereas NRI directors had not
given personal guarantee for any loan.
Though CLB had observed that the principle of 'legitimate expectation'
was applicable in the case of the petitioners, in the light of the materials
placed and the stand taken by the contesting respondents, the High Court opined
that the claim 'legitimate expectation' could not be extended to and there was
no specific promise that the petitioners would be given directorship
permanently. Even otherwise, the same
could not be accepted in view of the mandate of the statute that 1/3rd of the
directors had to retire in a year by rotation.
Accordingly, the conclusion arrived at by the High Court was to be accepted
and the decision of the CLB on that aspect was to be rejected. [
In
respect of the annual general meeting, which was held on 29-9-2005, it was
stated by the petitioners, that there was no proper notice in terms of section
172, read with sections 53(1) and (2), and, hence, they had no knowledge about
the said meeting and in view of the same, the decisions taken in the said
meeting were null and void and not enforceable.
According to the respondent No. 2 annual general body meeting was
convened on 29-9-2005 and, in fact, in the board meeting, held on 24-8-2005, a
reference was made to the next annual general meeting which stated that the
board decided to hold the meeting on 29-9-2005. It was also stated that the
particulars as to the date, place and time for the meeting were incorporated in
the draft notice and thereafter it was approved and the CMD was authorized to
sign the same. The said board meeting
was attended by the first petitioner. In such circumstances, it could not be
claimed that the first petitioner and his supporters were not aware of the
meeting. [
Though
on the basis of the said information/knowledge, it could not be construed that
the same would satisfy the mandate of section 172, read with sections 53 (1)
and (2), yet the fact that a decision was taken in the board meeting held on
24-8-2005 that next AGM was to be held on 29-9-2005, could not be ignored. In addition to the same, respondent Nos. 14
and 6 to 9, who were supposed to be neutral directors, participated in the AGM
held on 29-9-2005. It was not the case of the respondents or even the
petitioners that notice was dispensed with in respect of the AGM held on
29-9-2005. On the other hand, the
respondents had produced certificates of posting to establish the service of
notice on the directors and other shareholders.
It was also demonstrated that those notices were given under certificate
of posting as provided under sections 53 (1) and (2) and evidence for the same
were also produced. The first petitioner, being a party to the board meeting,
wherein date, place and agenda of the AGM were fixed, could not make a
complaint along with his supporters that they did not receive notice of the
meeting. The materials placed clearly
showed that NRI directors participated in the meeting and respondent No.14, who
was acting along with the petitioners, had also participated. Section 172 as well as section 53 emphasize
‘giving notice’. In view of the fact that the company had placed materials to
substantiate that notices, in terms of the above provisions, were given,
statutory presumption under section 53 would apply though the said act was
rebuttable. In view of the fact that
there were materials to show that notices were sent, the burden was on the
addressee to rebut the statutory presumption.
The High Court, on verification of those materials, had concluded that
"postal receipt with post office seal was produced to show that notice was
sent to all shareholders by certificate of posting in the correct address as
per the report". Sub-section (2) of
section 53 makes it clear that after expiry of 48 hours a notice duly addressed
and stamped and sent under certificate of posting is deemed to have been duly
served. In the instant case, dispatch of
notice in time by certificate of posting was proved. In addition to the same, the High Court had
very much relied on the fact that first petitioners was party to the board
meeting which decided the convening of AGM on 29-9-2005. The above information
pressed into service by respondents could not, lightly be ignored. [
It
was true that the CLB had found that only 40 out of 300 shareholders attended
the meeting and based on the same, the CLB accepted the case of the petitioners
and found that the AGM held on 29-9-2005 was defective. Before the CLB as well as the High Court, it
was demonstrated by the contesting respondents that in previous AGM also,
number of attendance was below 35. In
that regard, it was relevant to refer the order in interim application in the
suit which was filed by respondent No. 14.
The civil court, based on the documents produced, had concluded that
proper notice was served on the shareholders with regard to AGM held on
29-9-2005. The person, who filed the
said suit had praying for injunction against conducting AGM, participated in
the AGM and in fact he applied for re-election.
Though the shareholders voted against him and other NRI directors, the
information supported stand of the respondents.
The High Court had rightly concluded that AGM held on 29-9-2005 was
legal and acceptable. [
The
CLB set aside the election of respondent Nos. 16 to 23 as directors only on the
ground that there was no valid notice.
The discussion in the earlier paragraphs proved that said finding was
not acceptable. The High Court verified
the notice dated 24-8-2005 sent for AGM dated 29-9-2005 wherein the names of
the retiring directors were subsequently mentioned. It was also demonstrated before the CLB and
the High Court that proper advertisement in the newspapers were given in terms
of section 257(1A). Though the CLB had
not accepted the same, the High Court had rightly found that the same was in
compliance with the statutory provisions.
There was no error or illegality in the said finding of the High Court.
[
As
regards re-appointment of retired directors on the theory of legitimate
expectation, the High Court found that appointment of eight directors without a
‘specific agenda’ was irregular due to technical reason ; and that as per the
agenda only six directors could be elected.
The said conclusion was to be accepted. [
As
regards the allotment of ‘right shares’ to the public, the CLB had concluded
that without a ‘special resolution’ by 2/3rd majority shareholders right shares
could not be offered to outsiders.
Inasmuch as the above said conclusion was in terms of the statutory
provisions, the High Court had rightly approved the same. [
In
respect of the issue relating to issuance of duplicate shares to ‘P’ it was relevant to mention that the same
board approved the said action when the first petitioner also attended the
meeting. It was brought to the notice of
the Court that duplicate shares were issued on receipt of indemnity bond as
provided under section 84(2). In those
circumstances, the High Court had concluded that indemnity bond and documents
produced would show that share transfer was also effected validly. Further the decision to issue duplicate
shares to ‘P’ and transfer of the same were not challenged in the company
petition. Therefore, the ultimate decision arrived by the High Court was to be
accepted. [
Coming
to the allegation as to acts of mis-management particularly regarding the
arrangement with special investigating centre, it was proved that the agreement
with the special investigating centre was made when the petitioner Nos. 1 to 4
as well as their supporting NRI directors were in the Board and in active
management. However, the High Court had
directed the company auditor to go through the agreement with the special
investigating centre and also the accounts and submit a report and thereafter,
the same should be placed before the board for appropriate action. The said direction was reasonable and
acceptable. [
The
CLB missed a most basic principle of section 397, namely, that mere unfairness does
not constitute oppression. When the
petitioners were given the right to subscribe to the 'rights issue' along with
all others in the same proportion, no prejudice, whatsoever, could have been
caused to them. It was not in dispute
even by the petitioners that the need for more funds was an admitted position.
In fact, no unfair prejudice had been caused to the petitioners. The CLB failed to take note of all those
vital aspects and relied on irrelevant materials. Apart from those, it was pointed out that the
company having turned the corner and doing well, it would be fair exercise of
discretion by the Supreme Court not to interfere with the High Court judgment.
[
The
impugned judgment of the High Court was fair to both sides and safeguarded the
interest of the directors and shareholders. Hence, there was no valid ground to
interfere therewith under article 136 of the Constitution of India and,
consequently, the appeal was to be dismissed. [
Westfort Hi-Tech Hospital Ltd. v. V.S. Krishnan [2007] 76 SCL 185 (Ker.) - Affirmed.