SANGRAMSINH P. GAEKWAD AND ORS. v. SHANTADEVI P. GAEKWAD (I) THR. LRS. AND ORS

Citation: [2005] 1 S.C.R. 624

Court: Supreme Court of India

Bench: N. SANTOSH HEGDE, S.B. SINHA

Case summary

SANGRAMSINH P. GAEKWAD AND ORS. v. SHANTADEVI P. GAEKWAD (I) THR. LRS. AND ORS.pdf

Judgment text

SANGRAMSINH P. GAEKWAD AND ORS. v. SHANTADEVI P. GAEKWAD (I) THR. LRS. AND ORS. JANUARY 20, 2005 (N. SANTOSH HEGDE AND S. B. SINHA, JJ.

] Companies Act, 1956-Sections 397 and 398 : Private Company-Decision to increase shares and issue some ofthose to the members ofthe Company-Out ofthe shares to be given to the members, some were earmarkedfor the Chairman ofthe Company-Out ofthe remaining, few shares were allotted to two members and to the new Chairman-Out of the earmarked shares some were allotted to a member and to the family members of the new Chairman and rest of the issues were closed as the earmarked shares were renounced by the former Chairman-New Chairman transferred the shares owned by him and his family members to another Company owned by them-Company Petition filed by heir offormer Chairman claiming allotment of the earmarked shares to her being his sole heir and questioning transfer of the shares of new Chairman and his family to their Company-Another petition by member before Company law Board alleging oppression and mismanagement-Single Judge of High Court held the allotments and transfer valid while the Division Bench held the same as invalid-On appeal, held: Heir ofthe Chairman was not entitled to allotment of earmarked shares in her favour having admitted the fact of issuance of additional shares and allotment ofshares to the new Chairman-she had not proved the act of oppression against the new Chairman-Earmarked shares being provisionally allotted no legal rights in the shares were created-The claim oftitle as heir is not adjudicable under Company petition-Oppression andfraud not having been pleaded in the petition no reliefcan be granted on that count-Allotment of earmarked shares was bad in law-Transfer of the shares to the Company ofthe New Chairman was not an act ofoppression- Code of Civil Procedure-Order 6, Rules 4 and 17-Evidence Act, 1872- Section IOI-Trusts Act, 1882-Section 88.

Sections 397 and 398-Jurisdiction under-nature and scope of-It is ofwide amplitude and not ofordinary nature-The court while exercising its discretion not bound by the terms contained in Section 402-But the remedy ' "" S. P. GAEKWADv. SHANTADEVI P. GAEKWAD 625 not to be granted for every act of omission or commission-Reliefs to be granted on satisfaction of the court that the majority of the members had oppressed the minority shareholders-Interest of the company vis-a-vis the shareholders must be uppermost-The acts of oppression must be harsh and wrongful. Words and Phrases : 'Oppression '-meaning of in the context ofCompanies Act. The company in question (GIC) was started by FRG. Its equity capital consisting of 425 shares were mainly held by family members. Respondent No. 12 was Managing Director of its subsidiary company.

Board of Directors ofGIC decided to broad-base the company by increasing the capital by issuing 25000 equity shares and to issue 15000 equity shares therefrom to the members of the company. The resolution was confirmed in a meeting chaired by FRG. No one was interested in purchasing the issues. It was decided to keep 8000 shares out of the 15000 shares apart for FRG for the time being and to keep balance 7000 shares apart for other existing members. Respondent No. 12 and one member subscribed for 500 and 25 shares respectively and thus remaining 6475 shares out of7000'shares were allotted to appellant No. 1 and his family members. 500 shares out of the 8000 shares were allotted to respondent No. 12. As per the appellants, the remaining 7500 shares were renounced by FRG in favour of appellants. After death of FRG, appellant No. 1 became Managing Director of the Company. 3000 shares were allotted to the family members of appellant No. 1.

The remaining 4500 shares out of the 8000 shares remained unallotted and the issue was later closed. Respondent No. 12 issued to herself 1500 shares without allegedly issuing any notice to shareholders. GIC filed a civil Suit No. 675/90 against the subsidiary company questioning 1500 equity shares. In Written Statement thereof respondent No. 12 took the stand that the 8000 shares kept for FRG devolved on respondent No. 1 (mother of FRG) as class I heir. Appellants transferred 9415 shares in favour ofa Company which was wholly owned by them. Questioning the said transfer three suits were filed by different shareholders which are pending. Respondent No. 1 filed company petition u/ss. 397 and 398 ofCompanies Act before High Court for declaration that she being sole heir of FRG was allottee of 8000 shares of GIC and that allotment of 3000 shares in excess of 6475 shares to appellant No. I or his nominees was null and void ab-initio.

Later she amended the petition to the effect seeking declaration that all allotments of shares of GIC made beyond the original paid up capital consisting of 425 equity shares were null and void. Respondent No. 12 filed petition :. iefore Company Law Board on the ground of mismanagement of the Company and oppression and the same was disposed of by Company Judge. Single Judge of the High Court dismissing the petition held that allotment of 6475 shares having been admitted, no dispute could be raised as regard thereto; that allotment of 3000 shares out of 8000 shares was in terms of the decision of Board meeting and was after 8000 shares were renounced by FRG and hence was valid; that transfer of 9415 shares to the company of the appellants did not affect GIC; that since the appellants continued to form majority, any transfer in favour of their company did not amount to oppression; that respondent No.

I did not have right to 8000 shares by inheritence as an adhoc allotment of shares was merely an invitation which did not culminate in a right; that in this case there was no mismanagement but only an apprehension that the change in control might amount to mismanagement. Division Bench of High Court allowing the appeal, held that allotment " of 6475 and 3000 shares was invalid; that transfer of 9415 shares to the company of appellants was also invalid as no transfer notice was given to the company as required in terms of Article 8 of the Article of Association; that there was breach of fiduciary duty on the part of appellant No. I. Hence the present appeals. Partly allowing the appeals, the Court HELD: 1. 1. The Appellant No. 1 had no fiduciary duty to inform the Respondent Nos. 1, 12 and 13 as regard the benefit or otherwise of opting for allotment of shares.

The Appellants herein in no way can be held to have any fiduciary liability towards other shareholders in respect of issuance of 6475 shares in their favour. [707-B; 667-C] 1. 2. Issuance of equity based capital shares under the Companies Act in relation to a private company would be governed by its Memorandum of Association and Articles of Association. It has not been pointed out that in terms of Memorandum of Association the Board ofDirectors acted ultra vires in adopting a resolution as regard issuance of 25000 capital shares; out of which 15000 shares were to be issued at the first instance. Section 81 of the Companies Act indisputably has no application in relation to a private S. P. GAEKWADv. SHANTADEVI P. GAEKWAD 627 ,. .... company, the pre-requisite thereof is, thus, not attracted in the instant case. Appellant No.

1, therefore, apart from Section 88 of the Indian Trusts Act in the event of its applicability did not have any statutory obligation to discharge as a trustee in this behalf. [656-G-H; 657-A-B] 1. 3. The standard of conduct expected of a director in relation to transaction with the shareholders will differ and would necessarily depend upon the circumstances and the nature of the responsibility. It is, thus, not possible to lay down a law which will have universal application. In an >. appropriate case, a fiduciary relationship may come into being having regard ,.. to the responsibility undertaken by the directors towards the shareholders ·by way of a special contract (667-D-FJ 1. 4. The directors do not have any fiduciary duty to advise shareholders . as to when and in what manner they should enter with the transactions with the company including acceptance of offer of additional shares.

Such fiduciary duty would arise inter alia in exceptional situations when the directors take upon themselves the task of advising the shareholders who may be his family members or when a transaction of purchase or sale is entered ~ into by and between the director and the shareholders wherein the former taking undue benefit or having ill or improper or ulterior motive or malafide t act solely to make pecuniary benefit and gain for himself and to the detriment of such shareholders. If a general fiduciary duty of a director vis-a-vis shareholders is laid down the same would lead the directors to the risk of multiple legal actions by dissenting minority shareholders. Fiduciary duty of the Directors to the Company should not be equated with the duty of the shareholders. (667-G-H; 668-A; 661-H] Nana/al Zaver andAnr. v. Bombay Life Assurance Co. Ltd andOrs. , (1950] ~ SCR 391 and Needle Industries (India) Ltd and Ors. v. Needle Industries Newey .. j. (India) Holding Ltd and Ors.

, [1981] 3 SCC 333, relied on• Mis. Dale and Carrington Invt. P. Ltd and Anr. v. P. K. Prathapan and Ors. , (2004) 7 SCALE 586; Bajaj Auto Ltd. v. N. K. Firodia andAnr. etc. , [1970] 2 SCC 550 and Mis. Harinagar Sugar Mills Ltd v. Shyam Sunder Jhunjhunwala and Ors. , [1962) 2 SCR 339, distinguished. ")L Barclays Bank v. Quistc/ose Investments, (1970) AC 567; Percival v. Wright, (1902) 2 Ch. 421; Ge/ting v. Kilner, (1972) 1 All ER ll66; Glavanics v. Brunninghausen, (1996) 19 ACSR 204; Puntv. Symons, (1903) 2 CH 506; Peskin andAnr. v. Anderson and Ors. , (2001) l BCLC 372; Coleman and Ors. v. Myers .. ... and Ors. , (1972) 2 NZLR 225 and Brunninnghausen v. G/avanies (1999) 46 NSWLR 538, referred to. Dawson International pie v. Coats Patons pie, (1988) SLT 854, referred to. Palmer's Company Law, 23rd edition, page 848 and Pennington's Company Law 6th Edn. at page 608-09, referred to. .. 2. In view ofthe findings that having regard to the nature oftransactions as the Appellant No.

I did not have any fiduciary duty towards the contesting ~ Respondents, the question of invoking the provisions of Section l I l of the Evidence Act does not arise in the instant case. (668-F-G[ Krishna Mohan Ku/ Alias Nani Clfaran Ku/ andAnr. v. Pratima Maity and Ors. , [200419 SCC 468 and Regal (Hastings) Ltd v. Gulliver and Ors. , (1967) 2 AC 134, distinguished. Needle Industries (India) Ltd and Ors. v. Needle Industries Newey (India) Holding Ltd and Ors. , (198113 SCC 333, referred to. , 3. 1. Respondent No. I in her company petition having admitted the ~ factum of broad-basing of the company by issuance of 15000 additional equity shares and allotment of6475 shares in favour of the Appellants herein cannot now be permitted to turn around and raise the correctness or validity thereof. (707-Cj 3. 2.

It cannot be believed that the contesting respondents were not aware of the decision of the Board of Directors to broad-base the company and allotment of 8000 shares in favour of FRG out of the same. A transaction by a lady who is illiterate or a purdah-nashin and a transaction by a lady who ~ looks after the family business/family property would be differently viewed. _}. She, being the Managing Director of the subsidiary company, would be presumed to know the affairs of the Company as the subsidiary company on her own showing would be vitally affected by the rights issue. (674-B; 677-Cj 3. 3. In relation to allotment of 7500 shares, respondent No. I and 12 are estopped and precluded from questioning the allotment having received the benefit thereof and having full knowledge thereabout all along. [682-DI 3. 4. The matter relating to the claim of respondent No-I to succeed FRG as his Class I heir is pending adjudication in Civil Suit. She claimed title in S. P. GAEKWADv. SHANTADEVl P.

GAEKWAD 629 respect of 8000 shares by inheritance in terms of Hindu Succession Act. Indisputably, in terms of Section 15 of the said Act she is a Class I heir but the Appellants herein contend that the said provision has no application having regard to Section 5(2) thereof as inheritance in the family is governed by the rule of primogeniture. A pure question of title is alien to an application under Section 397 of the Companies Act wherefor the lack of probity is the only test. Furthermore, it is now well-settled that the jurisdiction of the Civil Court is not completely ousted by the provisions of the Companies Act, 1956. [684-G-H; 685-A-BJ Dwarka PrasadAgarwal v. Ramesh Chander Agarwal, [2003] 6 SCC 220, referred to. 3. 5. A dispute as regard right of inheritance between the parties is eminently a civil dispute and cannot be said to be a dispute as regards oppression of minority shareholders by the majority shareholders and/ or mismanagement.

Furthermore, in the said suit when an application for interim injunction was filed only, a prima facie observation was made to the effect that the succession was not to be governed by Hindu Succession Act. Such observations do not constitute a binding decision as no finality is attached thereto. [685-B-q 3. 6. The claim of Respondent No. 1 as regards declaration of her title and/ or allotment of 8000 shares is not tenable in law. The alleged right of Respondent No. 1 to claim title over the said shares as a class 1 heir of FRG cannot be determined in an application filed under Sections 397 and 398 of the Companies Act and in particular having regard to the fact that the said question is pending adjudication in a duly instituted civil suit. (707-E-FJ 3. 7. Moreover, the allotment in favour of the members of the Company was provisional in nature which would amount to invitation to offer and not an offer.

A right to a share would fructify only when an offer made by the company is accepted. Only upon acceptance ofsuch offer, a binding contract comes into being. When a share is allotted in favour ofa person as a member of the company, it becomes his personal right. Such a personal right is not heritable. By reason of a mere provisional allotment without making any payment therefor no legal right in the shares was created. It would also be of some interest to note that even initial allotment of shares cannot be transferred. (685-H; 686-8) Canbank Financial Services Ltd v. The Custodian and Ors. , JT (2004) 7 ~· SC 266; Madura Mills Co. Ltd, (1937) Comp. Cas 71 and Needle Industries * .. (India) Ltd and Ors. v. Needle Industries Newey (India) Holding Ltd and Ors. , (19811 3 sec 333, relied on. 3. 8. The transactions relating to issue of 3000 additional shares in the names of Appellant Nos. 3 to 5 and 500 shares to Respondent No.

12 out of the 8000 shares originally allotted to FRG are bad in law. The Appellants have utterly failed to prove that there has been any renunciation of 8000 shares by FRG or any resolution was taken in this behalf by the Board. Even At allotment of500 shares in favour ofRespondent No. 12 out ofsaid 8000 shares is invalid. In that view of the matter, children of appellant No. 1 applied for + further 3000 shares through him and in view of the availability of shares, the Board of the Company decided to issue and allotted the said 3000 shares to them cannot be accepted. It also does not appear that the Board of Directors or the Management Committee took any resolution to allot shares to the other members out of the said 8000 shares. (688-E; 688-A-C] 3. 9 The provisions of the CPC do not envisage that pleadings in any other case should be the basis for grant of relief, particularly, when the plea , taken in both the petitions are contradictory and inconsistent with each other.

Before this Court affidavits from different proceedings made by the same person or by the other supporting or opposing the application have been " placed. They have not been cross-examined. Their attention had not been drawn to their earlier statements which could be done only in terms ofSection 145 of the Evidence Act. With the view to elicit the truth the court must have before it a clear picture. In this case, the parties have not made any efforts to examine themselves in court so as to enable the other side to cross-examine them. Had the parties to the proceedings been examined and cross-examined, they could. have been. confronted with the earlier statements made by them in another affidavit. (683-D-F] >- > Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors.. (1981) 3 SCC 333, referred to. 4. 1.

Division Bench of the High Court committed a serious error in holding that the transfer by the Appellants in favour of the company of the appellants being bad in law, the members of the company were entitled to allotment thereof on pro-rata basis. (691-B] -¥ 4. 2. Transfer of9415 shares by the Appellants in favour ofthe company of the appellants by itself was not an act of oppression keeping in view the S. P. GAEKWAD v. SHANTADEVI P. GAEKWAD 631 ~ -' fact that the entire shares of the said company were held by the Appellants alone and in any event the notice of transfer having been rescinded, the Appellants continue to be the owner in respect thereof. (707-F-G) 4. 3. When a notice to the company by a member is vitiated, the same can be withdrawn in law. Furthermore, a transfer in violation of Articles of Association is void. (689-G) Palmer's Company Law, 23rd Edition 2214, referred to. )>. 4. 4. The existing shareholders are not entitled to be given further pre- ...

emptive rights in respect of those unaccepted shares. Even such a right can be waived or modified. [690-D) 4. 5. A pre-emptive right is granted in favour of a member of a private company so that his right of control is not taken away. Exercise of such preemptive rights is particularly needed in relation to those private companies which are essentially incorporated partnerships. [690-G) 'Principles of Modern Company Law' by Gower and Davies Seventh " Edition Page 635, referred to. "/- 4. 6. The expression 'oppressive', would mean burdensome, harsh and wrongful. 'Oppression' thus, must relate to the manner in which the affairs ofthe company are being conducted and the conduct complained of must be such as to oppress the minority members. By reason ofsuch acts ofoppression, it must be shown that the majority members obtained a predominant voting power in the conduct of the company's affairs. [692-G-H) 4. 7.

The jurisdiction of the Court to grant appropriate relief under Section 397 of the Companies Act is of wide amplitude. The court while ~ exercising its discretion is also 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 deem fit and proper, is warranted. [693-A-B) Bennet Coleman and Co. v. Union ofIndia and Ors. , (1977) 47 Comp. Cases 92; Syed Mahomed Ali v. R. Sundara"! urthy and Ors. , AIR (1958) Madras 587 and Shanti Prasad Jain v. Union ofIndia, 75 Born LR 778, referred to, «y referred to. 4. 8. 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 analyzing 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 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. (693-C-E) 4. 9.

The interest of the company vis-a-vis the shareholders must be uppermost in the mind of the court while granting a relief under Sections 397 and 398 of the Companies Act. 1956. [693-E) 4. 10. The remedy under Section 397 of the Companies Act is not an )' ordinary one. The acts of oppression must be harsh and wrongful An isolated incident may not be enough for grant of relief and continuous course of ,,.. oppressive conduct on the part ofthe majority shareholders is, thus, necessary to be proved. The acts complained of may either be designed to secure pecuniary advantage to the detriment of the oppressors or wrongful usurpation of authority. [693-G-H) Halsbury's Laws ofEngland, 4th Edition, Volume 7, para 1011, referred to. 4. 11. When a complaint is made as regard violation of statutory or ~ contractual right.

the shareholder may initiate a proceeding in a civil court > but a proceeding under Section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view the wide and far-reaching power of the court in relation to the affairs of the company. [694-D-El 4. 12. The Court in an application under Sections 397 and 398 may also look to the conduct of the parties. The Court may also refuse to grant relief -'( where the petitioner does not come to court with clean hands which may lead to a conclusion that the harm inflicted upon him was not unfair and that the relief granted should be restricted. [698-D, E-F) ~ I S. P. GAEKWADv. SHANTADEYI P. GAEKWAD 633 .. ,... ... -Re London School ofElectronics, (1986) Ch. 211, referred to. 4. 13.

A case for grant of relief under Sections 397 and 398 of the Company Act must be made out in the petition itself and the defects contained therein cannot be cured nor the lacuna filled up by other evidence oral or documentary. [698-H; 699-A] Re Bengal Luxmi Cotton Mills Ltd. (1965) 35 CC 187, referred to. )I. 4. 14. When a decision is taken on a business consideration, it is trite, -t the court should not ordinarily interfere. [699-F] Maharashtra Power Development Corporation Ltd. v. Dabhol Power Co. and Ors. , (2004) 3 Comp Ll 58 (Born), referred to 4. 15. The allegations made in the Company Petition filed by Respondent No. 12 could not have been the subject matter of adjudication by the High Court. Respondent Nos. 1 and 12 had initiated different proceedings in different forums to suit their own purposes. From the materials brought on records, it can safely be inferred that proceeding before the Company Law Board was initiated by Respondent Nos.

12 when it was discovered that Respondent No. I may not obtain any relief i.. _the Company Petition filed by her before the High Court. [695-A, C-D] ·· 4. 16. Respondent No. 1 in her application did not disclose the grounds for challenging the issue of 6475 shares to the Appellants. In that view of the matter the relief granted by the High Court to the effect that issue ofall shares beyond 425 shares is bad in law cannot be sustained having regard to the fact that a bald prayer was made in the petition without laying any foundation therefor in the company petition. Such reliefs evidently had been granted keeping in view the allegations made by Respondent No. 12 in her company petition filed before the Company Law Board, Delhi which is impermissible in law. [695-E-F] Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors. , (1981] 3 SCC 333; Shanti Prasad Jain v. Kalinga Tubes Ltd. etc.

, AIR (1965) SC 1535 and Scottish Cooperative Wholesale Society Ltd v. Meyer and Anr. , (1958) 3 WLR 404, referred to. H. R Harmer Ltd. , (1958) 3 All ER 689 (CA) and Re Five Minute Car Wash Service Ltd. , (1966) 1 All ER 242, referred to. ~· 'f 4. 17. When the petitioners have consented to and even benefited from the company being run in a way which would normally be regarded as unfairly prejudicial to their interests, they might have shown no interest in pursuing their legitimate interest in being involved in the company. (695-F-G) RA Noble and Sons (Clothing) Ltd (1983) BCLC 273, referred to. 4. 18. The burden to prove oppression or mismanagement is upon the petitioner. The Court, however, will have to consider the entire materials on " records and may not insist upon the petitioner to prove the acts ofoppression. ' An action in contravention of law may not per se be oppressive. [699-G) Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd and Ors.

, (1981) 3 SCC 333, relied on. Mohan/al Ganpatram and Anr v. Shri Sayaji Jubilee Cotton Jute Mills Co. Ltd and Ors. , AIR (1965) Guj. 96, referred to. 4. 19. The conduct which is technically legal and correct, thus, may justify , grant of relief on the application of the just and equitable jurisdiction and ,,. conversely that conduct involving illegality and contravention ofthe Act may not suffice to warrant grant of any remedy. Isolated act of oppression may not be sufficient to grant any relief but there should be a continued oppression therefor. The test oflack of bonafide should be applied in both for the winding up petition and while determining an application under Section 397 of the Companies Act. (700-C-D) Re Guidezone Ltd, (2000) 2 BCLC 321, referred to. 5. 1. Respondent No. 1 in her application under Section 397 of the > Companies Act did not complain of any act of mis-management. Complaints ). of mis-management were made by the Respondent No. 12 only.

For the purpose of grant of relief, the High Court could only consider the pleadings filed in Company Petition filed by respondent No. 1. If no relief could be granted having regard to the pleadings contained therein, it is inconceivable in law that such relief would be granted on the basis of the pleadings made in other proceedings and totally ignoring the admissions made by Respondent , ¥ No. I in tile proceedings initiated by her. (700-D-F) Shoe Specialities Ltd v. Standard Distilleries and Breweries (P) and Ors. , S. P. GAEKWAD v. SHANTADEVI P. GAEKWAD 635 . ,. -'" (1997) 1 Comp. lJ 243 and Jesner v. Jarrad Properties, (1993) BCLC 1032, referred to. 5. 2. Application filed by Respondent No. 1 before the High Court does not contain the requisite pleadings, as to whether appellant No. I was guilty of commission of fraud. Having regard to Rule 6 of the Company Courts Rules, the provisions of CPC will be applicable in a proceeding under the Companies Act.

In terms of Order 6, Rule 4 of CPC, the plaintiff is bound to give particulars of the cases where he relies on misrepresentation, fraud, > breach of trust, etc. Level of proof required for proving fraud is extremely high. 1700-G-H; 701-AI ChiefEngineer, MS. EB. andAnr. v. Suresh Raghunath Bhokare, (2004) 8 Supreme 845 and A. C. Ananthaswamy and Ors. v. Boraiah, (Dead) By LRS. (2004] 8 sec 588, relied on. Maharashtra Power Development Corporation ltd v. Dabhol Power Co. and Ors. , (2004) 3 Comp Ll 58 (Born), referred to. " 5. 3. Order 6, Rule 17 CPC provides for amendment of the pleading whereas Order 8, Rule 9 provides for subsequent pleadings by a defendant. 1 The company petitioners did not raise a plea as regard the value of the company share or commission of fraud by appellant No. I herein and/or his fiduciary duty towards them either as a director or as a person looking after the interest of the family in the discharge of his duty under as a director. [701-E-F] 5. 4.

Respondent Nos. 1 and 12 are bound by their own pleadings. CPC being applicable to a proceeding of this nature, not only the plea of fraud is required to be specifically pleaded and proved. Even an amendment of ~ pleadings could not have been permitted if thereby the Company Petitioner ~ made an attempt to get rid of her admission. (701-H; 702-A-B] 5. 5. In terms of Sectiom 58 of Evidence Act, things admitted need not be proved. In view of the admission of Respondent No. 1 alone, the issue as regards allotment of 6475 shares should have been answered in favour of the Appellants. The Company Petitioner at a much later stage could not be permitted to take a stand which was contrary to or inconsistent with the original pleadings nor could she be permitted to resile from her admissions contained therein. Admissions made by Respondent No. 1 was admissible against her proprio vigore. [702-D-F] Nagindas Ramdas v. Dalpatram Iccharam alias Brijram and Ors.

, AIR (1974) SC 471; Biswanath Prasad and Ors. v. Dwarka Prasad and Ors. , AIR (1974) SC 117 and Viswalakshmi Sasidharan (Mrs. ) and Ors. v. Branch Manager, Syndicate Bank, Belgaum, (1997110 SCC 173, relied on. 5. 6. Judicial Admissions by themselves can be made the foundations of the right of the parties. In the instant case,Respondent No. 1 even did not amend the company petition by withdrawing the admissions or resiling thereform. 1703-C, Fl Mis. Modi Spinning and Weaving Mills Co. Ltd and Anr. v. Mis. Ladha Ram and Co. , AIR (1977) SC 680; Kaveripatnam Subbaraya Setty Annaiah Setty Charities Trust v. SK. Viswanatha Setty, 120041 8 SCC 717 and Heera Lal v. Kalyan Mal and Ors. , 1199811 SCC 278, relied on. Mis. ABL Ltd Durgapur, Burdwan v. Radha Gobinda Ghatak and Ors. , (1999) 1 CHN 645 and Krishna Gupta and Ors. v. Madan Lal and Ors. , (2000) 96 DLT 829, referred to. 6. 1. A company incorporated under Indian Companies Act is a body corporate.

However, in certain situations, its corporate veil can be lifted. 1705-D) Kapila Hingorani v. State ofBihar, 12003) 6 sec 1, referred to. 6. 2. The Court, however, has made a clear distinction between a family company, a private company and a public limited company. The true character of the company, the business realities of the situation should not be confined to a narrow legalistic view. 1705-D-E) Needle Industries (India) Ltd and Ors. v. Needle Industries Newey (India) Holding Ltd and Ors. , (19811 3 SCC 333, referred to. 6. 3. Principles of quasi-partnership is not foreign to the concept of Companies Act. For the purpose ofgrant of relief the principles of partnership had been applied even in a public limited company. (705-E-F) Loch and Anr. v. John Blackwood Ltd (1924) AC 783 and Ebrahimi v. Westbourne Galleries Ltd and Ors. , (1972) 2 All ER 492, referred to. 6. 4.

When more than one family or several friends and relatives together form a company and there is no right as such agreed upon for active S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J. ] 637 participation of members were sought to be excluded from management, the principles of dissolution of partnership cannot be liberally invoked. 1705-G-HI Hind Overseas Private ltd v. Raghunath PrasadJhunjhunwa/la and Anr. , AIR (1976) SC 565 and Ebrahimi v. Westbourne Galleries ltd and Ors. , (1972) 2 All ER 492, referred to. 6. 5. It cannot be said that for no purpose whatsoever the principles of quasi-partnership can be applied to an incorporated company. The real character of the company, for the purpose of judging the dealings between the parties and the transactions which are impugned may assume significance and in such an event, the principles of quasi-partnership in a given case may be invoked.

The true character of the company and other relevant factors shall be considered for the purpose of grant of relief having regard to the concept of quasi partnership. [706-F-H; 707-A) Ki/pest Pvt. ltd and Ors. v. Shekhar Mehra, [1996) 10 SCC 696, overruled. " Needle1ndustries (India) ltd. and Ors. v. Needle Industries Newey (India) Holding ltd and Ors. , [1981) 3 SCC 333, relied on. Maharashtra Power Development Corporation ltd v. Dabhol Power Co. and Ors. , (2004) 3 Comp Ll 58 (Born), referred to. CIVIL APPELLATE JURISDICTION: Civil Appeal No. 6359 of2001. From the Judgment and Order dated 9. 8. 2000 of the Gujarat High Court in OJ. A. No. 7195 in Company Petition No. 51 of 1991. WITH C. A. Nos. 6360 and 6361 of 200I. Harish N. Salve, Kailash Jethmalani, Gopal Jain, Ms. Nandini Gore, Ms. Saloni Gupta, R. N. Karanjwala, Ms. Pragya Baghel and Mrs. Manik Karanjawala for the Appellants. Ashok H. Desai and P. V. Kapoor, Ms. Anu, Vinodh Khanna and Krishna Kumar for the Respondents.

The Judgment of the Court was delivered by S. B. SINHA, J. These appeals are directed against a judgment and ~ _, order dated 9. 8. 2000 passed by a Division Bench ofthe High Court of Gujarat at Ahmedabad in 0. 1. Appeal Nos. 6, 7 and 8of1995 whereby and whereunder the judgment and order dated 17. 12. 1994 passed by a learned Single Judge of the said Court dismissing Company Petition No. 51 of 1991 filed by the First Respondent herein, was set aside. BACKGROUND FACTS : Sir Pratapsinghrao Gaekwad was the Ruler of Baroda. Maharani Shantadevi Gaekwad was his wife. They had eight children. For certain reasons with which we are not concerned, the estate of Gaekwad came into the hands " of their elder son, Fatesinghrao P. Gaekwad (FRG) even during the life time of Sir Pratap Singh. FRG floated several companies, three of which are Baroda Rayon Corporation Ltd. (BRC), Gaekwad Investment Corporation Company Ltd. (GIC) and Alaukik Trading & Investment Corporation Pvt. Ltd. (Alaukik).

BRC came into existence in 1958. At the outset, it was being run under Managing Agency System which was abolished in or about 1968 and later on the same was being managed by the Board of Directors with the assistance of professional executives. Appellant No. I herein, the youngest son of Pratapsinghrao Gaekwad, joined the said company in 1968. He was • the Director of Managing Agents till 31. 12. 1969 whereafter he became the Additional Director with effect from Ist January, 1970. He in the same year l,. became Joint Managing Director. Jn April 1976, he became the Managing Director of BRC. He was reappointed as Managing Director for two periods of five years each with effect from 19th February, 1980 arid 19th February, 1985. FRG passed away on ! st September, 1988, whereafter he was appointed as Chairman and Managing Director on 23. 9. 1988. GIC was a small investment company. Its equity capital consisted of 425 shares of Rs. I00 each.

The said shares were mainly held by the family members. A large chunk of shares was held by Jaisingh Ghorpade Trust of '" which FRG was a trustee. The beneficiaries of this Trust are said to be > outsiders. Some shares of GIC were held by outsiders also. The share holding pattern of the Company was as under : Sr. Name No. of Shares No. I. Shrimant Fatesinghrao Gaekwad 301 "' 2. H. H. Maharani Shantadevi Gaekwad 7 3. H. H. Maharani Padmavatidevi Gaekwad 20 S. P. GAEKWADv. SHANTADEVIP. GAEKWAD [SINHA, J. ) 639 ~). 4. Prince Ranjitsingh P. Gaekwad 10 5. Shrimant Sangramsinh P. Gaekwad 6. Princess Shubhanginidevi Gaekwad 5 7. H. H. Mrunalinidevi Puar 10 8. Shrimant Lalitadevi Kirdatt 5 9. Shrimant Shivrajkurnar > IO. H. H. Padmavatidevi Gaekwar & 4 H. H. Maharani Shantadevi Gaekwar -. 11. Shrimant Pramila Raje of Jasdan 4 12. Shrimant Asharaje Gaekwad 5 13. Shrimant Ajaysinh Murarrao Ghorpade 14. Shrimant Vasundhara Raje Murarrao Ghorpade 15. Shrimant Ashokraje Gaekwad 16.

Shrimant Vimala Raje Gaekwad "' 17. Shrimant Devayanidevi Gaekwad -+ 18. Shrimant Ajitsinh Gaekwad 19. Shri Jaysinghrao M. Ghorpade & 5 H. H. Maharani Padmavatidevi Gaekwad 20. Shrimant Dilipsinh G. Desai & 5 Smt. Kusumben D. Desai 21. Smt. Kusumban D. Desai & 5 Shri Dilipsinh G. Desai ... 22. Capt. V. S. Hazare 10 ,;... . 23. Smt. Pramilabai Hazare IO 24. Shri Malhari N. Khade 25. Shri Rameshchandra V. Dhaibar 10 Total equity shares 425 '"' Alaukik was a subsidiary of GIC. Respondent No. 12, Mrs. Mrunalini Devi Puar was its Managing Director. Allegedly, GIC suffered a loss during the financial years ending 3Ist March, 1987 and 3Jst March, 1988 as a result whereof substantial parts of the equity and reserves were wiped out. It could not c;ven pay off the loans and credits. It had no funds to subscribe for the rights issue made in 1989 by BRC.

Its share holding in BRC was likely to fall with which its forged fortunes were closely linked as the dividend from the shares of BRC was the major source of income of the company. GIC came into financial trouble when BRC did not declare dividend in 1986-87. The value of BRC shares also declined and, thus, it became difficult to avail of an overdraft facility from the Banks. It was then decided to raise funds from the existing memhers. The Board of Directors ofGIC in a meeting held on 10. 11. 1987, decided to broad-base the company, whereafter an extraordinary general meeting was convened on 17. 12. 1987. In the said EGM, a decision was taken to increase the capital by issuing 25000 equity shares of Rs. 100 each. The matter was again placed in a Board Meeting of GIC on 8th January, 1988. In the said Board Meeting presided over by Appellant No. I and attended by Mr. P. U. Rana and Mr. P. H. Chinoy, a resolution was passed that 15000 equity shares of Rs.

100 each be issued at par to the members of the company. The said resolution reads as under : "Resolved that out of 25000 equity shares of Rs. I00 each, 15000 equity shares of Rs. I00 covering Rs. 15,00,000 be issued at par to the members of the Company at present and the balance as and when required. Further Resolved that the Management Committee of the Company be and is hereby authorized to issue equity shares to members in such proportion as it deems fit. Further Resolved that the Management Committee be and is hereby authorized to do all such acts, deeds and things necessary for the . purpose. " Pursuant to or in furtherance of the said resolution, the Company Secretary, Mr. M. N. Khade issued a circular letter dated 12. 2. 1988 to all the existing shareholders requesting them to subscribe for the equity shares at par wherefor a time limit of three weeks was fixed.

It was stated that if no reply is received by I0th March, 1988 it would be presumed that the concerned shareholder was not interest'! d in the offer. The said circular letter reads as under : "12th February, 1988 S. P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J. ] 641 1·> Shrimant Fatehsinhrao Gaekwad Hoechest House, Nariman Point Bombay 400 021 It has been decided to increase the equity capital of the Company by the issue of 15000 equity shares ofRs. 100 each at par, to the members of the Company. You are hereby requested to convey your acceptance for the number of shares for which you would like to subscribe, along with a cheque ,. covering the full amount at the rate of Rs. I00 per share, within three weeks from the date of receipt of this letter. If no reply is received - ... by 1Oth March, 1988 it will be presumed that you are not interested in the offer and the shares will be offered to the other members. Thanking you, Yours faithfully, For Gaekwad Investment Corporation Pvt.

Ltd. "' (M. N. Khade) -1 SECRETARY" On or about 13th February, 1988, another meeting was convened which was chaired by FRG wherein the resolution passed in the meeting dated 8th January, 1988 was confirmed. The Managing Committee, having regard to the fact that no offer was received from the existing shareholders, in its meeting dated 2Ist March, 1988 extended the time for the aforesaid offer. It was further decided that out of 15000 shares, 8000 shares be kept apart for the time being for FRG and the balance 7000 shares be kept apart for other ... existing members. Allegedly, on instructions of Appellant No. I herein, the .... Company Secretary gave first option to the other family members to subscribe for shares according to their request and the remaining were put in the name of Appellant No. I and his family; pursuant whereto only two persons, Mrs. Puar asked for allotment of 500 shares and Mrs.

Shubhanginidevi Gaekwad for 25 shares respondent and, thus, the remaining 6475 shares were allotted to Appellant No. I and family. It is further alleged that FRG became disinterested in the 8000 shares allotted to him. The contention of the Appellants herein is that the balance 7500 shares were renunciated by FRG in his favour and in favour of his children in June, 1988 as the same remained unallotted as other members specifically refused to take up any share. His sons and daughters applied for further 3000 shares through Appellant No. 1 as guardian and the same was allowed. The remaining 4500 shares, however, remained unallotted. The issue is said to have been closed on 10. 12. 1988. Respondent No. 12, Mrs. Puar who was the Managing Director of Alaukik in a meeting held on 12. 10. 1989 which was chaired by her issued to herself 1500 shares without allegedly issuing any notice to the existing shareholders and wherefor allegedly no payment was even made.

It is contended that by reason of such overt act, the Respondent No. 12 herein, came in majority ofAlaukik as a result thereofit would cease to be a subsidiary company of GIC. GIC had 84% shares in Alaukik but by reason of the said allotment in favour of Respondent No. 12, its share holding therein was diluted to 32%. The account of the Company was also said to have been transferred to a current account. On 1. 9. 1990, a Civil Suit being No. 675/90 was filed by GIC against Alaukik questioning inter alia the allotment of 1500 equity shares of Rs. 100 each to the defendant No. 2 therein. In the said suit, Mrs. Puar filed her written statement on 29. 11. 1990 wherein inter alia a stand was taken that 8000 shares kept apart for FRG devolved on Shantadevi as a Class I heir of FRG. She incidentally applied for allotment ofthe said shares also on 29. 11. 1990. A contention was also raised in the said written statement that if the said shares are allotted, Respondent Nos.

1 and 12 would be holding the majority shares in GIC and Alaukik even if allotment of 1500 shares in Alaukik is held to be bad in law. It is also not in dispute that lndreni Holding Pvt. Ltd. (Indreni) was a wholly owned company of the Appellants herein. Allegedly, by way of tax planning, the Appellants herein decided to transfer 9415 shares in favour of the said company wherefor allegedly a letter was prepared by the Company Secretary on or about 15. 11. 1989 which reads as under : "November 15, 1989 To All the Shareholders. The Company has received intimation from existing shareholders about their intention to sale some of their shares of Gaekwad S. P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J. ] 643 'l""J Investment Corporation the details of which are attached herewith. Pursuant to the provision of the Articles, it is hereby brought to your notice about the sale of the shares by the existing shareholders.

You are 'therefore requested to intimate to the Company about your interest in purchasing the share before 20th December, 1989. Please note that in case if the company does not hear from you within stipulated period it will be construed that you are not interested in purchasing...................................... of the same as board deem fit. 'j _. , Yours faithfully, For Gaekwad Investment Corporation Pvt. Ltd. (M. N. Khade) SECRETARY" It, however, stands admitted that the said letter was not circulated. The Appellants herein were allegedly under a belief that the said notice " had been circulated and as no response thereto was received, they transferred 9415 shares out of 9481 shares to Indreni.. Questioning the said transfer, three ·-+ suits came to be filed by different shareholders marked as Suit No. 305/90, 867/90 and 872 of90. Suit No. 305/90 was filed by Pramilaraje Khacchar on 28. 11. 1990 in the Rajkot Civil Court wherein inter alia following reliefs were sought for : "A.

it be declared that the purported sales and transfers by the defendants Nos. 3 to 7 of the 9415 equity shares owned by them in the first defendant company in favour ofthe second defendant company are ultra vires their powers, illegal, null and void ab initio and that J the said shares continue to be of the ownership of the respective ... defendants Nos. 3 to 7 as if no such sale or transfer was ever made. B. a decree for permanent mandatory injunction be passed in favour o_f the plaintiff and against the first defendant directing it to offer and transfer the said 9415 equity shares in the first defendant company to the plaintiff and other remaining members. ·... ,;, C. a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the defendant No. 2 restraining the second defendant from exercising or enjoying any voting or other rights in \ respect of the said 9415 equity shares in the first defendant company. D.

that a decree for permanent mandatory injunction be passed in favour of the plaintiff and against the second defendant directing the second defendant to repay the first defendant company dividend, if any, paid to the second defendant with interest at 24 per cent per annum. E. any other relief that the Hon'ble Court deems fit in the circumstances of the case be granted. " Suit No. 867/90 was filed by Shubhangini Gaekwad in Baroda Civil Court on 12. 12. 1990 praying for identical reliefs. Suit No. 872of1990 was filed on 19. 11. 1990 by Ajit Singh Gaikwad, the Respondent No. 8 herein, wherein one additional relief was claimed which is in the following terms : "it be decreed and first defendant be directed to offer and transfer 9415 equity shares with distinctive numbers mentioned in para 18(a) to the plaintiff and other remaining members of the first defendant company in pursuance of the Articles of Association. " In Suit No.

305 of 1990, concededly an order of injunction was passed on 28. 11. 1990, as prayed for by the plaintiffs, restraining Indreni from exer~ising or enjoying any voting or other rights in respect of the said 9415 equity shares in GIC. A similar order of injunction was passed by Civil Judge, S. D. Vadodara in Suit No. 867 of 1990 in the suit filed by Mrs. Shubhanginidevi Gaekwad on 12. 12. 1990. In their replies filed in the suits, the Appellants herein inter a/ia contended that a Board Meeting was convened on 13. 7. 1990 for reconsidering the transfer of shares to Indreni. They also sought for legal opinion in view ofthe fact that the notice dated 15. 11. 1989 was not circulated to the members. The purported resolution passed in the said meeting reads as under : "Resolved that the transfer of 9415 equity shares in favour of Indreni Holdings Pvt. Ltd. approved by the Board on 30. 3. 90 be reconsidered and that the matter be referred to Transferors and Transferees.

Resolved further that the legal opinion be sought in the matter of (' S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J. ] 645 captioned transfer of 9415 equity shares of the company in favour of lndreni Holdings Pvt. Ltd. " The Respondents herein, however, contend that the said resolution was a fabricated one as no Board Meeting was held on the said date. On or about 20th July, 1990, the Appellant No, 1 issued a letter to the Board of Directors that ifthe transfer of shares was found to be irregular, he should be permitted to remove transfer notice as per articles. On 9. 8. 1990, allegedly, a Board meeting was held and the shares transferred to lndreni were rescinded. The Respondents contend that the said plea is by way of an afterthought inasmuch as dividend had been paid to lndreni and TDS on the amount ofdividend was deposited in State Bank of India after 9. 8. 1990. The said suits are still pending. lndisp11tably, Respondent Nos.

1 and 12 herein took inspection of the Registers of Members and other documents on 10. 12. 1996 and the relevant extracts were taken and notarised. An Annual General Meeting was allegedly held on 20. 12. 1990 wherein .. except for appointment of auditors all other resolutions e. g. seeking appointment of Directors in favour ·of Appellant No. 1, his wife (Appellant No. 2) and his group were rejected. In the said meeting the share holdings said to have been acquired by Jndreni i. e. 9415 shares was not taken into account and the voting rights of the Appellants were kept confined to 66 shares. It is also not in dispute that prior to the said meeting, Appl'llant No. 1 lodged a First Information Report apprehending trouble in the said meeting. Respondent No.

1 filed an application under Sections 397 and 398 before the Gujarat High Court on or about 4th March 1991 wherein she initially prayed for the following reliefs : (A-i) Declaration that she is allottee of 8000 equity shares of respondent No. 6 company. (A-ii) Direction to issue share certificates immediately to her of these 8000 shares. (B) Declaration that issue and allotment of 3000 shares in excess of 6475 shares to respondent No. 1 (present Appellant No. I) or nominees of respondent No. 1 to 5 (present Appellant No. I to 5) is null and void ab-initio. ..... .. (C) Declare that she is sole heir of Late FRG and as such she is entitled to be in majority and control ofrespondent No. 6 company. (D) Declare respondent No. I, 2 (present Appellant No. I and 2) 9, IO and 11 (present Respondent No. 9,10,11) have ceased to be directors in respondent No. 6 company. (E) Restrain by injunction respondent No. I, 2 (present Appellant No. I and 2) 9, JO and 11 (present Respondent No.

9, 10, 11) from acting as director, officer of respondent No. 6 company. .. f:. (F) Declare any act deed or thing done after A. G. M. of 20-12-1990 ~ by respondent No. I, 2 (present Appellant No. I and 2) 9, I0 and 11 (present Respondent No. 9,10,11) as null and void. (G) Declarations in regard to resolutions passed at the E. G. M. dated 14-1-1991. (H) Appointment of receiver. (I) Pending Admission respondent No. I and 2 (present Appellant No. I and 2) be directed to produce before this Hon'ble Court or "' receiver all documents, papers, etc. ... (J) Pending admissions interim injunction against respondent No. I, 2 (present Appellant No. I and 2) 9, I0 and 11 (present Respondent No. 9,10,11) from acting as directors or officers of the company. (K) Ad-interim reliefs in terms of para H, I and J above.

However, the said reliefs were subsequently amended and the following additional reliefs were also prayed for : "A-I That this Hon'ble Court be pleased to declare that all allotments of shares in Respondent No. 6 company made beyond the original .... ,. paid up capital consisting of 425 equity shares as existing on 23rd March 1988 are null and void and illegal and of no legal effect whatsoever and be pleased to set them aside; A-2. In the alternative to praye~. A-I and in any event, this Hon'ble Court be pleased to declare that the allotments of 6475 equity shares to Respondent Nos. I to 5 and/ or to their nominees or to the members of their nominee or to the members of their family is subject to the simultaneous allotment of 8000 equity shares to petitioner no. I. 500 equity shares to Smt. S. P. GAEKWADv. SHANTADEVIP. GAEKWAD [SINHA, J. ] 647 -+:. Mrunalinidevi Puar, 25 equity shares to Smt.

Shubhangini Devi Gaekwad and that the allotment of any further shares including the said 3000 shares to Respondent No. 4 and 5 is null and void and illegal and be pleased to set them aside. A-3. In the evem that this Hon'ble Court holds that the allotment of 6475 shares to Respondent Nos. 1 to 5 a:id of 3000 shares to Respondent Nos. 4 and 5 is valid, this Hon'ble Court be pleased to declare that the said 9475 shares were transferred to Mis. lndrani ~ Holdings Pvt. Ltd. and shall be offered and transferred by Respondent No. 6 to the shareholders holding pro rata on the basis of the original - ER I 166 or when the general body of shareholders is only two of them Glavanics v. Brurnninghausen, (1996) 19 ACSR 204. In Palmer's Company Law, 23rd edition, page 848, it is stated : "64-02. Relationship is with company : The fiduciary relationship of a directol" exists with the company : the director is not usually a trustee for individual shareholders.

Thus, a director may accept a shareholder's offer to sell shares in the company although he may ), have information which is not available to that other, and the contract cannot be upset even if the director knew of some fact which made -/. the offer an attractive proposition. So in Percival v. Wright a person who had approached a director and sold him shares in the company, afterwards, upon discovering that the director had known at the time of the contract that negotiations were on foot for the purchage by an outsider of all the shares in the company at a higher figure, could not impeach the contract. In his judgment Swinfen-Eady J. said "there is no question of unfair dealing in this case. The directors did not approach the shareholders with the view of obtaining their shares. The shareholders approached the directors and named the price at .... which they were desirous of selling. " ~ In Pennington's Company Law 6th Edn.

at page 608-09, it is stated : "Directors owe no fiduciary or other duties to individual members of their company in directing and managing the company's affairs, acquiring or disposing of assets on the company's behalf, entering into transactions on its behalf, or in recommending the adoption by members of proposals made to them collectively. If directors mismanage the company's affairs, they incur liability to pay damages or compensation to the company or to make restitution to it, but individual members cannot recover compensation for the loss they have respectively suffered by the consequential fall in value of their shares, and they cannot achieve this indirectly by suing the directors for conspiracy to breach the duties which they owed the company.

However, there may be certain situations where directors do owe a fiduciary duty and a duty to exercise reasonable skill and care in advising members in connection with a transaction or situation which involves the company or its business undertaking and also the individual holdings of its members. " In Dawson International pie v. Coats Patons pie, [1988] SLT 854 Percival (supra) was relied upon holding that the Directors are, in general, under no fiduciary duty to shareholders and in particular current shareholders with respect to the disposal of their shares in the most advantageous way as directors are not their agents and as such are not normally entrusted with the management of their shares. It was, however, observed tbat if the directors take it upon themselves to give advice to current shareholders they have a duty to act in good faith and not fraudulently nor can mislead the shareholders whether deliberately or carelessly, in which event, they may have a remedy.

A distinction, thus, has been carved out as regards the fiduciary duty of the directors with regard to the property and funds of the company as contra-distinguished from the duty of directors to current shareholders as sellers oftheir shares. In case of conflict between two interests, the company's interest must be protected. The directors, however, will have a fiduciary relation if they have taken unto themselves the burden of giving advice to current shareholders. The aforementioned principles of law found favour with the Court in Needle Industries (India) Ltd. and Ors. v. Needle Industries Newey (India) Holding Ltd. and Ors. , [198!

] 3 SCC 333 wherein it was held: "Where directors of a company seek, by entering into an agreement to issue new shares, to prevent a majority shareholder from exercising control ofthe company, they will not be held to have failed in fiduciary duty to the company if they act in good faith in what they believe, on reasonable grounds, to be the interests of the company. If the directors' primary purpose is to act in the interests of the company, they are acting in good faith even though they also benefit as a result. " S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA,). ) 661 ~ .. In Needle (supra), this Court furthermore noticed Punt v. Symons, (1903) 2 CH 506 and opined in the following terms : "105. Jn Punt v. Symons, (1903) 2 Ch 506: 72 LJ Ch 768: 89 LT 525: 52 WR 41, and which applied the principle of Fraser v.

Whalley, 71ER361: 11LT175, it was held that: Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting ..... power, they ought to be restrained from holding the meeting at which > the votes of the new shareholders were to have been used. But Byrne, J. stated : There may be occasions when Directors may fairly and properly issue shares in the case of a company constituted like the present for other reasons. For instance it would not be at all an unreasonable thing to create a sufficient number of shareholders to enable statutory powers to be exercised. ... 106. Peterson, J. applied the principle enunciated in Fraser 71ER361 : II LT 175 and in Punt (1903) 2 Ch 506: 72 LJ Ch 768 : 89 LT ~ 525: 52 WR 41 in the case of Piercy v. S. Mills & Co. Ltd. , (1920) I Chancery 77: (1918-19) All ER Rep 313 (Ch D): 122 LT 20: 35 TLR 703.

The lea~ed Judge observed at page 84 : "The basis of both cases is, as I understand, that Directors an; not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholders..... " )... .... What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the Company... " In Needle Industries (supra) and Nana/al Zaver (supra) was affirmed stating the sole test is whether the issue of shares is simply or solely for the benefit of the Directors holding : "If the shares are issued in the larger interest of the company, the decision to issue shares cannot be struck down on the ground that it r has incidentally benefited the Directors in their capacity as shareholders.

" Fiduciary duty of the Directors to the company should not be equated with the duty to the shareholders. In Peskin and Anr. v. Anderson and Ors. , [200 I] I BCLC 372, Percival (supra) as also other decisions taking similar or contrary view were noticed by the Court of Appeal including the judgment of the Court of Appeal in New Zealand in Coleman v. Myers as also Court of Appeal of New South Wales in Brunninghausen v. Glavanics, (1999) 46 NSWLR 538 and held that the directors had no fiduciary duty to the shareholders in the facts and circumstances obtaining therein. However, observations were made therein that such duties may arise in special circumstances demonostrating the salient features and well-established categories of fiduciary relationship such as agency which involves duties of trust, confidence and loyalty.

Absence of special circumstances or special reasons as pointed out hereinbefore normally would not bring in the concept of fiduciary relationship in a director vis-a-vis the current shareholders. However, iu Coleman (supra) ... and Brunninghausen (supra) it was held that the fiduciary duties of directors to the shareholders exist in the specially strong context of the familial -. \. relationships having regard to their personal position of influence in the company concerned. We may at this stage consider the case laws replied upon by Mr. Desai. Mis. Dale & Carrington Inv/. P. ltd. and Anr. v. P. K. Prathapan and Ors. , (2004] 7 SCALE 586, requires a closer scrutiny. In that case one P. K. Prathapan (Prathapan), an NRI through his mother induced Ramanujam to promote a company by making initial investment of Rs. 5 lakhs in shares.

Prathapan, the principal shareholder of the Company came to know that the Board of Directors in its meeting held on 24th October, 1994 and chaired by Ramanujam, adopted a resolution on the premise that sum of Rs. 6,86,500 stood to the credit of said Ramanujam and in lieu thereof equity shares of Rs. I00 each would be allotted in his favour. Prathapan was not intimated about the said meeting. By reason of the said act, Prathapan who was a majority shareholder in the Company was reduced to a minority. The case of Prathapan was that Ramanujam did not contribute any money from his own resources for the purpose of starting the company and he all S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J. ] 663 along drew a handsome salary for working as Managing Director thereof. The charge of oppression and mismanagement against Ramanujam by Prathapan before the Company Law Board succeeded.

However, the only relief which Prathapan obtained was a direction upon him to sell his shares to Ramanujam which was questioned by him. This Court held that the directors act on behalf of a company in a fiduciary capacity and their acts and duties are to be exercised for the benefit ofthe company. It, however, while analyzing the acts of a director as an agent of the company observed that in a limited sense they are also trustees for the shareholders of the company. However, without discussing the limitations of such fiduciary relationship, it was observed : "15 The fiduciary capacity within which the Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disc. losure to the shareholders regarding all important matters relating to the company.

It follows that in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. This duty is owed by them to the shareholders of the company. Therefore, even though Section 81 of the Companies Act which contains certain requirements in the matter of issue of further share capital by a company does not apply to private limited companies, the directors in a private limited company are expected to make a disclosure to the shareholders of such a company when further shares are being issued. This requirement flows from their duty to act in good faith and make full disclosure to the shareholders regarding affairs ofa company. The acts ofdirectors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives.

" Evidently, therefore, the ratio which emerges from the decision is that the duty to disclose as regard issue of additional shares is relatable to proper purpose thereof. If the purpose is proper and the action of the director is bonafide, the ratio should not be extended so as to hold that such a duty of the director towards the shareholder is absolute despite the fact that there is no legal requirement therefor. Duty of disclosure to shareholders in that case had a strong nexus with the affairs of the company. Dale and Carrington (supra) is not an authority for the proposition that the purported fiduciary duty of a director towards the shareholder is absolute although the transaction in question may not have a direct co-relationship with the affairs of the +... company. Moreover, the Bench did not have the advantage of considering the 4- Judge Bench decision of this Court in Nana/al Zaver (supra).

It furthermore did not have the advantage of noticing the decisions of other jurisdictions which had been noticed hereinbefore. The Court, it is interesting to note, noticed Needle Industries (supra) as regards the power of the company to issue new shares but the legal effect thereof was not considered in details. The directors have a power to issue additional capital shares and in the process may obtain some pecuniary gain but only when such pecuniary gain is obtained through ulterior motive, they would be answerable to the shareholders. It is also interesting to note that while applying the 'extraneous purpose test' or 'ulterior motive test', the Court noticed Piercy v. S. Mills & Co. Ltd, (1920) I Ch.

77 wherein it was held : "The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existinf,\ majority of shareholders. " The expression 'merely' assumes significance. Significantly, in Needle Industries (supra) it was categorically held that the Directors have power to issue shares at par even if their market price is p higher being primarily a matter of policy.

(See para 120) 'Proper purpose' doctrine and the doctrine of 'fairness' vis-a-vis the doctrine of'bonafide' was considered in view of its findings that the allotment of all additional shares was gained by Ramanujam through manipulations and commission of acts of frauds upon becoming the Managing Director of the Company with a view to gain sole control of the management thereof and to the exclusion of Prathapan. The ratio in Dale and Carrington (supra), thus, must be understood to have been rendered in the fact situation obtaining in that case. It does not lay down a law that fiduciary duty of a director to the company extends to a shareholder so as to entitle him to be informed of all the important decisions S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J. ] 665 taken by the Board of Directors.

Such a broad proposition of law, ifunderstood to have been laid down in Dale and Carrington, would be inconsistent with the duty of a director vis-a-vis the Company and the settled law that the statutory duty of a direction is primarily to look after the interest of the company. In Bajaj Auto Ltd. v. N. K. Firodia and Anr. etc. , [19/0] 2 SCC 550, the Court was concerned with the discretionary exercise of power by the Directors in terms of Section 111(3) of the Companies Act. In the 1ight of refusal by + director to register a transfer, the Court held that it is necessary for the )directors to act bonajide and not arbitrarily in the following terms : "12. Article 52 of the appellant company provided that the Directors might at their absolute and uncontrolled discretion decline to register any transfer of shares. Discretion does not mean a bare affirmation or negation ofa proposal.

Discretion implies just and proper consideration of the proposal in the facts and circumstances of the case. In the exercise of that discretion the Directors will Act for the paramount interest ofthe company andfor the general interest ofthe shareholders because the Directors are in a fiduciary position both towards the company and towards every shareholder. The Directors are therefore required to act bonafide and not arbitrarily and not for any collateral motive. " (emphasis supplied) This Court therein also applied the bonafide test ofthe Director and for the benefit of the company as a whole. In that case, the directors assigned reasons which were tested from three angles view, viz. , (i) whether the directors acted in the interest of the company; (ii), whether they acted on a wrong principle; and, (iii) whether they acted with an oblique motive or for a collateral purpose. It was observed in Mis. Harinagar Sugar Mills Ltd. v. Shyam Sunder Jhunjhunwala and Ors.

, [1962] 2 SCR 339 that the action of the directors must be set aside if the same was done oppressively, capriciously, corruptly or in some other way malafide. In this case, this Court is not faced with such a situation. In Coleman and Ors. v. Myers and Ors. , (1977) 2 NZLR 225 the gist of the complaint made by the appellants against the first respondent was that he planned to acquire total control of the company at virtually no cost to himself by means of selling the Strand-Coburg and other properties of the company and making use of its liquid capital reserves; that his inside knowledge of the company's affairs and the advice he obtained showed him that there were good prospects of accomplishing this, leaving him sole owner of an unencumbered asset worth some millions; and that he not only refrained from disclosing to the shareholders generally his plan and the magnitude of his potential gain, but also made misrepresentations tending to conceal the plan.

In the aforementioned factual backdrop while holding that mere status of a company director would not create any responsibility towards a + shareholder but it was observed that the standard of conduct required from a Director in relation to dealings with them will depend upon all the surrounding circumstances and the nature of responsibility which in a real and practical sense he has assumed. In Pennington's Company Law, at page 609, on Coleman (supra), it is commented: "It is uncertain whether this reasoning can be extended to other situations where directors owe duties to the company but the relevant decision has to be made by its members individually or collectively, and the directors advise them as to the decision they should make.

Such situations would include a proposed sale or disposal of the company's assets and undertaking, a proposed merger or division of the company, a proposed reorganization ofthe company's share capital affecting existing members and a proposal for the voluntary liquidation of the company. " No law in absolute terms, thus, had been laid down therein. In the instant case, there had been no transaction of sale and purchase of shares between the director and the shareholder. The said decisions, therefore, have no application in the instant case. In way it instead of supporting the contention of Mr. Desai, counters his views. It is interesting to note that in Needle Industries (supra), this Court said even in certain cases the Directors attempt to maintain their control over the company or in newly acquiring may not amount to abuse of their fiduciary power stating : S. P. GAEKWAD v. SHANTADEVI P. GAEKWAD [SINHA, J.

] 667 "Applying this principle, it seems to us difficult to hold that by the issue of rights shares the Directors of NIIL interfered in any manner with the legal rights of the majority. The majority had to disinvest or else to submit to the issue of rights shares in order to comply with the statutory requirements of FERA and the Reserve Bank's directives. Having chosen not to disinvest, an option which was open to them, they did not any longer possess the legal rights to insist that the Directors shall not issue the rights shares. What the Directors did was clearly in the larger interests of the Company and in obedience to + their duty to comply with the law of the land. The fact that while discharging that duty they incidentally trenched upon the interests of the majority cannot invalidate their action. The conversion of the existing majority into a minority was a consequence of what the Directors were obliged lawfully to do. Such conversion was not the motive force of their action.

" No argument in this case was advanced as regard the purported breach of fiduciary duty on the part of the Appellant No. I in the matter of increase of shares during the life time of FRG before the learned Single Judge; on the other hand it was admitted that FRG during his life time was controlling the company, and, thus, the Appellants herein in no way can be held to have any fiduciary liability towards other shareholders in respect of issuance of 6475 shares in their favour. Directors may have a fiduciary duty where a take over bid is made for a company and its directors advise its shareholders whether to accept or reject the bid as they owe a duty to advice honestly. The standard of conduct expected of a director in relation to transaction with the shareholders will differ and would necessarily depend upon the circumstances and the nature p of the responsibility. It is, thus, not possible to lay down a law which will have universal application.

No authority has been brought to our notice which states that there exists a duty . in a director to advise the shareholder as to whether they should purchase the share of the company or avail the benefit of an offer. In an appropriate case, a fiduciary relationship may come into being having regard to the responsibility undertaken by the directors towards the shareholders by way of a special contract. The law which emerges from the discussions made hereinbefore is that the directors do not have any fiduciary duty to advice shareholders as to when and in what manner they should enter with the transactions with the company including acceptance of offer of additional shares.

Such a fiduciary duty would arise inter alia in exceptional situations when the directors take upon themselves the task of advising the shareholders who may be his family members or when a transaction of purchase or sale is entered into by and between the director and the shareholders wherein the former taking undue benefit or having ill or improper or ulterior motive or malajide act solely to make pecuniary benefit and gain for himself and to the detriment of such shareholders. If a general fiduciary duty of a director vis-a-vis shareholders + is laid down the same would lead the directors to the risk of multiple legal actions by dissenting minority shareholders. BURDEN OF PROOF : According to Mr. Desai, however, the burden to prove his bona fide was upon the Appellant No. I. The learned counsel in support of the said contention has referred to Section 111 of the Evidence Act and also relied upon a decision of this Court in Krishna Mohan Ku! Alias Nani Charan Ku! and Anr. v.

Pratima Maity and Ors. , [2004] 9 SCC 468. In Krishna Mohan (supra), this Court was considering a transaction resulting in execution of a deed of settlement by one Dasu Charan Kul. The said deed was executed in presence ofthe'witnesses although they were not in existence. The executant in that case was more than I00 years of age. He was paralytic and his mental and physical conditions were found to be not in order. Though his left-thumb impression was stated to have been affixed on the document, there was no witness who could substantiate that he had in fact put his thumb impression. In the aforementioned fact situation, provisions of Section 111 of the Indian Evidence Act was invoked holding that the burden of establishing perfect fairness, adequacy and equity is cast upon the person in whom the confidence has been reposed and the rule applies to all persons standing in _,.. confidential relations such as agents, trustees, executors, administrators, auctioneers, etc.

It was, however, clarified that in term of Section 111 of the Evidence Act, the person concerned should have been in a position of active confidence where fraud is alleged. In this case no transaction took place between the parties and, thus, the ratio of Krishna Mohan (supra) is not applicable to the fact of the present case. In view of our findings that having regard to the nature of transactions as the Appellant No. I did not have any fiduciary duty towards the contesting S. P. GAEKWADv. SHANTADEVI P. GAEKWAD [SINHA, J. ] 669 Respondents, the question of invoking the provisions of Section 111 of the Evidence Act does not arise in the instant case. In Regal (Hastings) Ltd. v. Gulliver and Ors. , (1967) 2 AC 134, an action was brought by the Appellants therein against the Respondents who were defendants to recover the amount specified therein towards profits made by them upon the acquisition and sale by them of shares in the subsidiary company formed by the Appellant.

The said action was also brought against the company's solicitor for recovery of the amount specified therein being + profits made by him in similar dealings in the shares. The action was based )' on claim for damages and misfeasance and for negligence on their part. It is in that situation, the doctrine of trust was applied. In the fact of the present matter neither a case of trust nor negligence nor misfeasance has been made out. The ratio which can be carved out from this case is that the Directors must not derive personal profit from information acquired by them as Directors. Such is not the case here. In Needle Industries (supra}, this Court observed that Section 397 "warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view". For the said purpose, the test required to be adopted is the true character of the company. The initial burden was upon the Respondent No.

I but nothing had been shown so as to hold that the burden shifted to the Appellants herein. ISSUE OF ADDITIONAL 15000 SHARES AND 6475 SHARES TO THE APPELLANTS : An Extraordinary General Meeting of the GIC was to be convened f• pursuant to the Board meeting dated I0. 11. 1987 wherein a resolution was adopted in the following terms : "Resolved that an Extra-Ordinary General Meeting of Gaekwad Investment Corporation Private Limited be convened to consider increase/ issue the capital of the company on Thursday the 17th December 1987 at 11. 00 A. M. in the registered office ofthe company. " Pursuant to or in furtherance of the said resolution an Extraordinary General Meeting of the GIC was held wherein a resolution was passed to increase the equity shares by 25000 shares at the rate of Rs.

I00 to the r members of the company in the following terms : "Resolved that Clause-V of the Memorandum of Association of Gaekwad Investment Corporation Private Limited be changed as under:- That the authorised capital of the company shall consist of Rs. 1,00,00,COO (Rupees One Crore) divided into 25,000 equity shares of Rs. 100 each and 75,000 four percent Non-cumulative Irredeemable Preference Shares of Rs. I00 + Resolved that capital clause ofthe Articles of A5sociation ofGaekwad ' Investment Corporation Private Limited be changed as under :- That the Authorised Capital of the Company shall consist of Rs. J,00,00,000 (Rupees one crore) divided into 25,000 equity share~ of Rs. JOO each and 75,000 four per cent Non-cumulative Irredeemable Preference Shares of Rs. I00 each. Further Resolved that the Board of Directors of the Company be and is hereby authorized to issue 25,000 equity shares to any members ,. they deem fit.

~ Further Resolved that in the event of the company being wound up on reduction of capital or otherwise the holders of the said Irredeemable Preference Shares shall be entitled to the surplus assets of the company applied in the first place in repaying to them the amount paid up on the irredeemable preference shares held by them respectively but shall not be entitled to any further participation in such surplus assets. In case of reduction ofcapital of the equity share capital, the holders ofequity capital shall not be entitled for repayment unless consent ofthe irredeemable preference share holders is obtained. ~ Further Resolved that the holders of the said preference shares shall not have any right to vote on any resolution placed before the company unless if directly affects the rights attached to their preference shares even if the dividend is not paid for any number of years, however, will have a right to vote only on those resolutions which will affect their interests.

" However, on 8. 1. 1988, the Board decided to issue 15000 shares out of 25000 shares to its members at that time. On or about 12. 2. 1988, a notice S. P. GAEKWADv. SHANTADEV! P. GAEKWAD [SINHA, J. ) 671 was issued asking the members for acceptance and remit cheque covering the full amount as regard shares allotted to them in three weeks, i. e. , by l0th March, 1988. Issuance of the aforementioned notice is not disputed. The Appellant No. I herein in the company petition filed by Respondent No. l alleged that prior to the Managing Committee meeting a Board meeting was also held. Similar assertion was made in his affidavit dated 11. 4. 1992 in C. P. No. 7 of I992. Reference to the Managing Committee meeting, however, was not made by the Appellant No. l in his affidavit dated 10. 12. 1992 in C. P. No. 13 of 1992, but it is of not much consequence as would appear from the discussions made hereinafter. However, it appears that with a view to give effect to aforementioned lett