REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APEPAL NO.     601          OF 2009 (Arising out of SLP (C) No. 4364 of 2006)

Girdhar Gopal Gupta and Ors. …Appellants

Versus

Aar Gee Board Mills Pvt. Ltd. and Ors.  …Respondents

J U D G M E N T

Dr. ARIJIT PASAYAT, J.

1. Leave granted.

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.

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 ‘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 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. The company

operated  the aforesaid  unit  for  few years  after  its  purchase.  However,  in

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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 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 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, awards were required to be made rule of the Court,

but no steps were taken in this behalf by either of the groups.

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. It was stated that these allotments were made

in the years 1994 and 1995.  

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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 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  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:

(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 also filed with the  Registrar of Companies on 20th

August, 1998.

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(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.  

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 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  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  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

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how these appeals wee heard together and were disposed of by a 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 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 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 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 utilized in the company which was closed down in 1995.”

The High Court noted that the Board recorded 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

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1994 and 1995, return of allotment of these shares was 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

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.  

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

aforesaid effect.

5. Learned Single Judge noted that there was some controversy about

the possession of company’s records. Though learned counsel appearing for

the Gupta Group referred to the final award of Arbitrators wherein it  has

been recorded that some records were in possession of the Garg Group, yet

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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 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 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, 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  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

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was  inferred  that  Gupta  Group  had  information  about  the  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.  

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

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 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  respondents  who originally  held 49.1% shares  have  been

increased to 76.5%.  

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9. Reference is made to Article 8 of the Articles of the 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 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.”     

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 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 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.

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Oppression in converting majority shares to minority shares is continuous

one  and,  therefore,  there  is  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  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.  

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  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

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new case is  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.

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 73, Gujarawala

Town,  Part-II,  G.T.  Karnal  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), 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 the

Article  of  Association.  Two  persons  were  present  in  the  meeting.   The

Board of Directors allotted 3943 equity shares when the requisite quorum of

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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 33

of  the  Articles  of  Association  as  well  as  under  Section  287  of  the  Act.

Auditor was appointed under Section 224 and power 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  allegations  of  fraud  or  mala  fide  intention  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  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  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

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getting sales  tax and income tax  assessment completed.  In the sales  tax

assessment proceedings appellant No.1 was representing the company. 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

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 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 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 question

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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 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 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  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  is

different  from receipt  of  share  application  money but  the conduct  of the

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parties and their understanding of the situation largely determines the basic

issue.

20. Considering the nature of the controversy we do not 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.

……………………………………J. (Dr. ARIJIT PASAYAT)

……………………………………J. (P. SATHASIVAM)

……………………………………J. (AFTAB ALAM)

New Delhi, February 2, 2009            

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