K. Kannan, J.

I. Disposition before the Company Law Board:

1. The company appeal has been filed at the instance of M/s. Sutlej Chit Fund and Financiers P. Ltd., Jalandhar, against the order passed by the Company Law Board (hereinafter referred to as "the CLB") dated May 23, 2008 Ajit Singh Deogan v. Sutlej Chit Fund and Financiers P. Ltd. [2009] 148 Comp Cas 18, in a petition filed by respondents Nos. 1 to 6 complaining of oppression and mismanagement under Sections 397 and 398 of the Companies Act, 1956. By the impugned order dated May 23, 2008 Ajit Singh Deogan v. Sutlej Chit Fund and Financiers P. Ltd. [2009] 148 Comp Cas 18, the Company Law Board had directed the seventh respondent to set aside the increase of shareholding and allotment of 3,000 additional shares and had further set aside the appointment of the eighth respondent Shri Vikas Sharma as an additional director of the company. By its impugned order, the Company Law Board had directed that the board be reconstituted at the next annual general meeting to be held within one month from the date of receipt of the order.

II. Background facts and the lis:

2. Certain facts relating to the circumstances under which the petition came to be filed would require to be stated. The seventh respondent-company had been incorporated as a private limited company on September 23, 1965, having been promoted by the father of the appellant, S. Ajit Singh Jhikka and one S. Surain Singh. The company which began its principal business in chit fund transactions closed its operation after the coming into force of the Prize Chit and Money Circulation Scheme (Banning) Act of 1978 and the company started the business of hire purchase of vehicles. At its commencement, the board of directors consisted of eight persons of whom S. Ajit Singh Jhikka died on May 26, 2002, Shri A.N. Gautam died on May 26, 2002, S. Atma Singh died in the year 1983, S. Amrao Singh died in the year 1984 and S. Parkash Singh also died in the same year. At its commencement, all the eight persons held 250 shares each at Rs. 100 per share. The appellant himself was inducted as a director of the company on May 29, 1992 and on January 31, 1996, became the managing director of the company.

3. The cause for complaint as acts constituting oppression and mismanagement was the increase in shareholding of the company from Rs. 2 lakhs to Rs. 5 lakhs divided into 5,000 equity shares at the alleged extraordinary general meeting held on February 14, 1996. The further complaint was that after the death of S. Atma Singh, who was one of the directors, his legal heirs, namely, Iqbal Singh Saini and Balbir Singh, who are respondents Nos. 3 and 4 applied for transmission of 250 shares in their names claiming as sons of S. Atma Singh on October 9, 1999. The second respondent-Jagbir Singh similarly had applied for transmission of 250 shares on October 9, 1999, claiming to be a son of S. Amrao Singh, who was reported to have died in the year 1984. Respondents Nos. 5 and 6 were reported to have applied for transmission of shares on March 16, 2000, in their favour claiming to be the legal heirs of S. Parkash Singh, who had died in May, 1984. The eighth respondent was reported to have been inducted as an additional director in the place of S. Ajit Singh Jhikka, who died in the year 2002. This induction was also the other point of contention by the respondents but the appellant would contend that such induction was a statutory necessity, for, the company could not have gone on with the affairs with one person as the director and it was mandatory to induct a new director.

4. The incipient rift was when the first respondent, who was a non-resident Indian and settled in Canada for more than 25 years made a complaint to the Deputy Director of Company Affairs, Department of Company Law and Justice, Kanpur, that the shareholding of the company had been illegally increased from 2,000 shares to 5,000 shares and pleading that his interest might be safeguarded. A copy of the complaint had also been sent to the Senior Superintendent of Police, Jalandhar. The company joined issues on the complaint given against it by its reply dated January 21, 2003, through its managing director denying all the allegations made in the complaint, pointing out, inter alia, that the first respondent himself was a proclaimed offender in India and was avoiding the process of law for the last more than 20 years. As regards the contentions raised by the other persons, who are cited as respondents Nos. 2 to 6 herein, the appellant would state that transmission of shares had been applied for as far back as on October 9, 1999 and March 16, 2000 and the persons who had the knowledge about the so-called illegalities of increase of the shareholding and the non-transmission of shares did nothing till August 2005, when they filed a petition before the Company Law Board. The main objections to the petition were that the petition was highly belated and not maintainable being barred by limitation. The induction of an additional director could not be termed to be an act of oppression since the company could not have been carried on with one director. The increase in shareholding itself ought not to have a cause for complaint since no serious prejudice has been caused by such increase. None of the petitioners had locus standi to even file a petition since they are not the members of the company, their names having not been entered in the list of members and their status as legal heirs had not been established in the manner known to law and they lacked the locus standi to prosecute the petition. When the gravamen of the charge against the company was that the petitioner had been kept in the dark about the affairs of the company and they had no notice of any annual general meeting for several years, the petitioner had contended that they had come to know about several illegalities made in the year 2005. The appellant took the preliminary objections to the effect that the petition itself was not maintainable since it did not satisfy the requirements of Section 399(1)(c) of the Companies Act, 1956 and that if the application for transmission of shares had been filed after a period of more than 15 years with no proof of death or grant of probate as succession certificate, the remedy was to file a petition under Section 111 of the. The claim itself was hopelessly barred by limitation.

III. The disposition of the Company Law Board:

5. The Company Law Board rejected the pleas made on behalf of the company through the appellant and observed that the company will be bound to transmit the shares to the respective legal heirs of the deceased shareholders without any further delay and also directed that the increase in the shareholding and the allotment of additional 3,000 shares was illegal, constituting a continuous act of oppression.

IV. Grounds of challenge:

6. The appellant assails the order passed by the Company Law Board on the following grounds:

(i) The shareholding of the company had been increased as far back as on February 14, 1996 and the petition filed more than nine years on August 4, 2005, was hopelessly barred by limitation.

(ii) The factum of increase of the shareholding was in the knowledge of the first respondent admittedly even as per the averments made in the complaint made on October 20, 2002 and the petitioners were guilty of inordinate delay and laches.

(iii) The applications for transmission of shares by respondents Nos. 2 to 6 had been filed on October 9, 1999 and March 16, 2000, respectively, for deaths that had occurred between the years 1983 and 1984. Such applications for transmission of shares were filed more than 15 to 16 years ago and that further the petition having been moved more than six years after their applications for transmission of shares were hopelessly time-barred. Since as per Section 110 of the Companies Act, 1956, an application for registration of transfer of shares, if it is refused to be registered, a person aggrieved ought to have appealed to the Company Law Board against such refusal to register the transfer or transmission within two months of the receipt of notice of refusal or where no notice had been sent within four months from the date on which the instrument of transfer or the intimation of transmission as the case may be was delivered to the company.

(iv) The increase of shares from 2,000 to 5,000 shares had been made after due notices to all the shareholders under postal cover on January 19, 1996 and the factum of increase had also been duly filed with the Registrar of Companies.

(v) Of the petitioners, only the first petitioner, who is the first respondent herein, had 250 shares and Smt. Kailash Wati Gautam had 200 shares in her name. As such, the petition was filed by the persons and consent of shareholders to the extent of 450 shares, it was only 9 per cent, of the shareholding in the company and did not meet the statutory requirement of one-tenth of the shareholding to maintain a petition under Sections 397 and 398 of the Companies Act, 1956.

(vi) The reasoning of the Company Law Board that Smt. Kailash Wati Gautam and the first petitioner, who constituted two out of fifteen shareholders met the alternative requirement of one-tenth of the total number of shareholders but even such a finding was fallacious since there were only eight original shareholders and persons in whose favour the shares were yet to be transmitted could not be taken into consideration for the purpose of meeting the requirements of Section 399(1)(a) of the.

(vii) Several observations of the Company Law Board relating to alleged letting out of the company premises at a very low rent was wholly without any basis and that such a letting had been made even prior to the appointment of the appellant as director of the company in the year 1992.

(viii) The order setting aside the appointment of eighth respondent as an additional director left the company with only one director, namely, the appellant and as per the scheme of the as single director cannot convene the annual general meeting for reconstitution of the Board, there was thus an inherent self-contradiction in the order passed by the Company Law Board where on the one hand, the appointment of additional director had been set aside and on the other, the single director had been mandated to hold the annual general meeting within one month for reconstitution of the Board.

V. Questions of law raised:

7. The order passed by the Company Law Board on the basis of contentions raised by the appellant address the following questions of law:

(a) Whether the petition filed by respondents Nos. 1 to 6 before the learned Company Law Board is barred by limitation

(b) Whether the learned Company Law Board can order transmission of shares in a petition filed under Sections 397 and 398 of the

(c) Whether the setting aside of increase in the shareholding of the company on February 14, 1996, by the learned Company Law Board is illegal and unsustainable

(d) Whether a single director can legally convene and hold an annual general meeting

(e) Whether a single director can constitute a board of director

(f) Whether there is an inherent contradiction in the directions given by the learned Company Law Board which cannot be executed and complied with

(g) Whether the impugned order is wrong, illegal, arbitrary and can be sustained in light of the detailed facts and the submissions made in the appeal

VI. The response from contesting respondents:

(i) Increase in share capital and allotment of additional shares without notice is an instance of oppression:

8. The contentions raised by the appellant are being resisted by the respondents with legal submissions with reference to pronouncements of the honble Supreme Court and the High Courts on the issue. The objections have been that, the increase in capital without adequate notice itself constitutes acts of oppression. To the said proposition, the reliance has been made on Malleswara Finance and Investments Co. P. Ltd. v. Company Law Board [1995] 82 Comp Cas 836, where a Bench of the Madras High Court held that allotment of additional shares with the only object of gaining control of the company with no proof that the company required additional capital, amounted to oppression and mismanagement. The Division Bench held so by consideration of the fact that when no valid offer had been made even to the existing shareholders and the consequence of issue and allotment amounted to oppression and mismanagement and such issue was bound to be interfered with and set aside. Additional issues of shares were themselves to be considered in the factual context, according to a decision of the honble Supreme Court in Dale and Carrington Invt. P. Ltd. v. P.K. Prathapan : [2004] 122 Comp Cas 161 : [2005] 1 SCC 212 [LQ/SC/2004/1029] . While adverting to the case of a private company, the court observed that though Section 81 relating to allotment of additional shares was itself not applicable to private companies, there was still a fiduciary duty owed to issue shares for a proper purpose and the directors of the private company were expected to make a disclosure to the shareholders in respect of issue of further shares. The non-applicability of Section 81 itself cast a heavier burden on the directors of the private limited company to see whether the shares were issued bona fide and for the benefit of the company. Such additional issue of allotment, which had the effect of reducing the majority shareholders to minority must ordinarily be considered as acts of oppression against the other shareholders. Thus, the court said that the fiduciary capacity within which the directors had to act enjoined upon them a duty to act on behalf of the company with utmost good faith, utmost care and skill and due diligence and in the interest of the company. They also laid down with reference to Section 291 of the Companies Act that an individual director had no power to act individually unless by some resolution of the board of directors of the company specific power had been given therefor. The fiduciary duty of a director was addressed by the honble Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad : [2005] 123 Comp Cas 566 : AIR 2005 SC 809 [LQ/SC/2005/80] : [2005] 1 RCR (Civil) 561 [LQ/SC/2005/80] : [2005] 11 SCC 314 [LQ/SC/2005/80] that such a fiduciary duty would arise in exceptional situations when the directors took upon themselves the task of advising the shareholders. The court said that once the issuance of additional shares is properly notified to all the shareholders, approved in the meeting of directors as also in the general meeting to the notice of all the shareholders cannot later be allowed to join issues on additional shares and the allotment to purchasers thereof merely because they have been among the directors of the company alleging the issue to be invalid unless it is shown to be fraudulent or oppressive. The honble Supreme Court laid with reference to its procedure to grant appropriate leave under Section 397 of the Companies Act in the following words (page 629 of 123 Comp Cas):

The jurisdiction of the court to grant appropriate relief under Section 397 of the Companies Act indisputably is of wide amplitude. It is also beyond any controversy that the court while exercising its discretion is not bound by the terms contained in Section 402 of the Companies Act if in a particular fact situation a further relief or reliefs, as the court may seem fit and proper, is warranted see Bennet Coleman and Co. v. Union of India : [1977] 47 Comp Cas 92 (Bom) and Syed Mahomed Ali v. R. Sundaramurhty [1958] 28 Comp Cas 554 : AIR 1958 Mad 587 [LQ/MadHC/1958/102] .

But the same would not mean that Section 397 provides for a remedy for every act of omission or commission on the part of the board of directors. Reliefs must be granted having regard to the exigencies of the situation and the court must arrive at a conclusion upon analysing the materials brought on records that the affairs of the company were such that it would be just and equitable to order winding up thereof and that the majority acting through the board of directors by reason of abusing their dominant position had oppressed the minority shareholders. The conduct, thus, complained of must be such so as to oppress a minority of the members including the petitioners vis-a-vis the shareholders which a fortiorari must be an act of the majority. Furthermore, the fact situation obtaining in the case must enable the court to invoke the just and equitable Rules even if a case has been made out for winding up for passing an order of winding up of the company but such winding up order would be unfair to the minority members.

The interest of the company vis-a-vis the shareholders must be uppermost in the mind of the court while granting a relief under the aforementioned provisions of the Companies Act, 1956.

(ii) Legal representatives could maintain the petition:

9. The objection regarding the maintainability of the petition at the instance of the persons who were not shown as members is responded by Counsel for the respondents by reference to a judgment of the honble Supreme Court in World Wide Agencies P. Ltd. v. Mrs. Margaret T. Desor : [1990] 67 Comp Cas 607 : [1990] 1 SCC 536 [LQ/SC/1989/639] , where the honble Supreme Court held that even the legal representatives of a deceased member of the company could maintain a petition under Sections 397 and 398 of the Companies Act. They were referring to a situation where after the death of a member whose name was still in the register of members, his legal representatives would be entitled to maintain a petition though they were not themselves registered as members. This construction was made possible with reference to Section 41 of the Companies Act where a member may be a holder of shares, but not vice versa. By the extension of the principle laid down, it could be easily seen that even the strength of shareholding necessary to maintain the petition must be reckoned with reference to persons, who have not themselves registered as members but holders of shares as legal heirs of the deceased members.

(iii) Allotment of additional shares without notice is bad in law:

10. While adverting to the objection taken by the appellant regarding the finding of the Company Law Board that the increase of shares made without proper notice was invalid, learned Counsel for the respondent refers to a decision of the Calcutta High Court in Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. [1984] 55 Comp Cas 160 that allotment of additional shares in order to reduce the majority shareholders to minority would be void for mismanagement and the notice without adequate details as to allotment would become null and void. The Bench held that where the allotment of shares might tilt the balance of the shareholding and might transform the major bulk of the shareholders into a minority group of shareholders, the particulars of allottees or the manner of their allotment should also be indicated necessarily, because, in the existing climate of erosion of the intrinsic sense of fairness, it is necessary to insist on certain procedural safeguards to ensure fair play in action in corporate management. The adjudication regarding the fraudulent conduct of some directors that could give right to an action was dealt with by the honble Supreme Court in United India Insurance Co. Ltd. v. Rajendra Singh : [2000] 100 Comp Cas 705 : AIR 2000 SC 1165 [LQ/SC/2000/520] and Gram Panchayat of Village Naulakha v. Ujagar Singh : [2000] 7 SCC 543 [LQ/SC/2000/1451] . Though these were not rendered in the context of dealing with the provisions of the Companies Act, they were cited as general propositions of law that "fraud and justice never dwell together" and it was erroneous to state that the Tribunal and the High Court has no jurisdiction to set aside an award on the ground of fraud disclosed later on. The effect of the decisions was that no specific action to set aside fraud be made but when a fraudulent transaction is shown in defence by any party, other party affected by such fraudulent conduct could point out to such fraud and avoid the same even in collateral proceedings.

VII. Consideration of the rival contentions:

(i) Presumption regarding service not available when receipt of notice is denied by the addressee:

11. Adverting to the defence taken by the appellant that the notices of meetings had been issued to the members under certificate of posting, learned Counsel for the respondents refers to the decision of this Court in Bhankerpur Simbhaoli Beverages P. Ltd. v. Sarabhjit Singh [1996] 86 Comp Cas 842, that Section 53 of the Companies Act contemplates the mode of services of notices or documents under certificate of posting or by registered post but the presumption to be drawn under Section 53 is never absolute but rebuttable. The court under particular facts and circumstances could even refuse to draw a presumption. I had an occasion to consider the presumption that could arise to certificate of posting and of registered letter in the decision rendered in Zora Singh v. Amrik Singh Hayer in C.A.P.P 38 of 2007 and connected cases decided on February 6, 2009 : : [2009] 149 Comp Cas 328 (P & H). Raising of presumption itself does not amount to proof. The result of a mandatory requirement for raising a presumption cast on the court, as under Section 53(2) of the Companies Act, is that the burden of proof is placed on the person against whom the presumption operates for disproving it. It is only if such a person is unable to discharge the burden that the court will act on the presumed fact. If the addressee states that he was never served with notice, still the person who is alleged to have sent the notice cannot use the presumption to his advantage without undertaking the burden of proving the actual service. I reject the contention of the appellants that notices of meetings were sent to respondents Nos. 1 and 7, whose names continued as members of the company.

(ii) Maintainability of petition by the legal representatives, even though not shown as members in the register of members of the company:

12. On the maintainability of the petition itself, I have no doubt in my mind that the contention of the appellant that only two of the members who held between themselves 450 shares constituted less than 10 per cent, of the total holding or less than one-tenth of the total number of members is not a sound argument if it is considered that even legal heirs of the shareholders as holders of the shares could maintain a petition. The decisions referred to by learned Counsel for the respondents of the maintainability of action at the instance of the legal representatives in World Wide Agencies P. Ltd., (referred to supra) ought to put at rest the contention regarding the fact that the persons in whose names, the transmission of shares had not taken place could not maintain a petition.

(iii) Mere increase in share capital cannot constitute oppression and mismanagement:

Similarly, the mere increase of shares by additional allotment itself ought not to be construed as an act of oppression and mismanagement and the said result would follow in a case where the action is mala fide and it is intended to wrest control and reduces a majority of members to minority without adequate opportunity being given to the members for taking the additional shares. In this case, it would be seen that the increase was from 2,000 shares to 5,000 shares and it is not shown anywhere that the increase itself has caused any additional liability on the shareholders. The most potent objection could be that the entire increase in the additional holding got to be cornered by the appellant and the eighth respondent themselves.

(iv) Legal representative who had not obtained transmission cannot complain of lack of notice:

14. If only the additional allotment had been offered fairly to all the members or of the legal heirs of the existing members, who later died, there ought not to have been a cause for complaint. The notice of the annual general meeting in which the increase in capital was to be issued and passed appears to have been issued only to two persons admittedly when the other legal heirs of the deceased had not been served with such notice. It is difficult to make a complaint about the want of notice to the legal heirs for, admittedly the applications for transmission of shares to the legal representatives had not made up to the time when the agenda for the increase of shareholding had been taken up. Although some of the directors have already died by then, the legal heirs had not taken any steps to have their names included as members treating themselves as the legal representatives. There is no duty for issuance of notice to the legal representatives of the deceased persons if no action had been taken by the legal representatives to have the shareholdings in their respective names. The contention by learned Counsel for the appellant that notices had been sent to all the persons who are shown as members in the register of members, who were alive at the time is good enough ground to sustain the decision taken by the board to increase the shareholding. It is difficult to attribute mala fides to persons, who were involved in the affairs of the company if the other persons, who were the legal representatives of the deceased directors and shareholders had not been vigilant about their own rights and sought themselves for inclusion of their names as such shareholders.

(v) Cause of action for complaint of oppression and mismanagement and bar of limitation:

15. It is difficult to believe that there was any justification for all the persons who claimed themselves to be the legal representatives as well as for the first respondent who had known about the increase of the shareholding even in the year 2002 to remain quiet for more than nine years from the time when the increase had been made and then complain in 2005 that the increase in the shareholding had been made without adequate notice to them. As far as the first respondent himself is concerned, the complaint that he was a proclaimed offender is not denied and as for the remaining persons, they had not taken steps for transmission of the shares in their names soon after the respective deaths of the existing shareholders, who later died. They had not adopted the procedure as laid down under Section 111 to have their names included by the alleged improper refusal of the appellant to accede to the request for such transmission. While the appellant had contended that there was no proof through probate or letters of administration as succession certificate to determine the steps as legal representatives, learned Counsel for the respondents states that such derivative title through appropriate grants under the Indian Succession Act had been submitted already. They had after all remedy under some other provision to have their names included by resort to Section 111 if there was an improper refusal by the persons held with the affairs to make such a transmission as required.

16. The observation of the Company Law Board that the properties had been let out for low rent also appears to be not correct and the contention of learned Counsel for the appellant that such letting out had been made even before he had been appointed as a director cannot be rejected as one without substance. The Company Law Board itself had no materials before it to enter a finding that the letting had been for inadequate rents; it was purely conjectural.

17. The company is a profit making company and nothing has been brought out to show that by increase in the shareholding there had been any prejudice to them. If the shareholding of the majority of persons who are legal representatives had rights to be offered with additional shares but it was not so offered, the respondents have to blame themselves for the laches on their part in failing to take action to come on board by appropriate action for transmission of shares within time. The issue of limitation was rejected by the Company Law Board on a sweeping observation that the increase in shares that had resulted without appropriate notice was a continuing wrong and therefore, there was no bar of limitation. If the issue had been a case of non-supply of notices to persons who were shown in the register of members and that an action had been taken to increase the shareholding and the appellant had wrested control by such an exercise, mala fides could be attributed. But if a majority of them had turned away from the affairs of the company and took no interest after the death of the shareholders in the years 1984 and 1985 moved applications before the Company Law Board 21 years later in the year 2005, there is hardly any justification for their contention that they were entitled to apply to the court complaining of oppression and mismanagement. While the Companies Act itself does not stipulate any particular period of time before when the applications could be entertained under Sections 397 and 398, still if the acts complained of had originated more than even nine years prior to the filing of the petition, the application ought to have been filed within three years from the date when the cause of action arose by applying Article 137 of the Limitation Act. In Surinder Singh Bindra v. Hindustan Fasteners P. Ltd. reported in it was held that Article 137 of the Limitation Act was applicable, but where the acts complained of consisted a continuing wrong, even an act that had commenced three years before the presentation of the petition could be taken notice of. In this case, the act complained of is the failure of the petitioner to accede to transmission of shares of the legal representatives, the persons did not resort to the procedure prescribed under Section 111 of the Companies Act. The nonissue of notice, increase of share capital and the non-offer of additional shares constitute a bundle of successive actions forming part of the same transaction and respondent No. 1 who was admittedly a member and who complained of non-service did not chose to take action within three years after they knew about the appellants allotting to themselves the additional shares. Under such circumstances, it should only be held that the petitions were not only barred by limitation; being guilty of laches, the extraordinary remedy available under the Companies Act on mismanagement could not be granted in favour of the petitioners. For the same reason, the impeachment of the appointment of the additional director, namely, of the eighth respondent ought to fail.

VIII. Present disposition:

18. Under the circumstances, the order of the Company Law Board is set aside. The action complaining of oppression and mismanagement is dismissed. Even while setting aside the order of the Company Law Board, the appellant as representing the company is directed to transmit the shares held by the deceased members in the names of the legal heirs who have obtained the necessary grants under the Indian Succession Act and who have petitioned to the company for transmission, for title to shares on the death of members cannot hang in vacuum and the right flows eo instanti. Such of the petitioners who have produced proof of heirship shall be entitled to have their names registered as members in the register of members by the prescribed procedure. The petitioners who claim as legal heirs of the deceased members are also at liberty to submit copies of the grants, if the company so demands for facilitating the act of transmission.

19. The company appeal is allowed in the above terms.

20. A photostat copy of this order be placed on each connected file.