w w w . L a w y e r S e r v i c e s . i n



Mrs. Sapna Gupta v/s Jagran Publications (P.) Ltd.

    C.P. NO. 110 OF 2007

    Decided On, 22 August 2008

    At, Company Law Board Principal Bench New Delhi

    By, S. BALASUBRAMANIAN
    By, CHAIRMAN

    U.K. Choudhary, Kanti Mohan Rustagi, D.K. Singh, Parag Goyal and Saurabh Kalia for the Petitioner. Sudipto Sarkar, Ms. Rita Bhalla, Dhruv Dewan and Monak Gehlot for the Respondent.



Judgment Text

1. This is a petition filed under section 250 read with section 111 of the Companies Act, 1956 (?the Act?) seeking for rectification of the register of members of M/s. Jagran Publications Private Ltd. (the company) by striking out the name of the 2nd respondent from the register.


2. The facts of the case are that the company was incorporated on 16-9-2005. It had two groups of shareholders, namely, UP group consisting of lineal descendents of late P.C. Gupta and M.P. Group constituting the lineal descendents of G.D. Gupta. The petitioners represent MP group and they collectively hold 30 per cent of the paid up capital of the company. The rest of their group holds further 30 per cent. This 60 per cent shares constitute 50 per cent voting rights in the company. The balance 40 per cent of shares is held by the 2nd respondent representing UP group, however, with 50 per cent voting rights in the company. Thus both the groups hold 50 per cent voting rights in the company. The total paid up capital is Rs. 25 lakhs of which the MP group has invested Rs. 15 lakhs and UP group Rs. 10 lakhs. Alleging that the 2nd respondent company has become disentitled to hold 40 per cent shares in the company on the grounds stated in the petition, the petitioner has sought for removal of the name of the 2nd respondent from the register of members.


3. Before dealing with the merits of the case, I consider it appropriate to extract the provisions of certain Articles of the Articles of Association of the company as the same would have bearing on the merits of this case.


Article 2(j) : UP group constitutes shareholders who are lineal descendents of late Shri P.C. Gupta and Company in which not less than 51 per cent shareholding is owned and controlled by their family members.


MP group constitutes shareholders who are lineal descendents of late Shri G.D. Gupta and company in which not less than 51 per cent shareholding is owned and controlled by their family members. For the purpose the terms ?control? or ?controlled? shall mean the power to direct the management, operations and/or policies of the company.


Article 7 : The entire authorized capital shall at all times remain issued to MP group and UP group in the ratio of 50:50 respectively, subject to the condition that in the event of any of the groups disposing of its whole or part of its holding to any third party (which can happen only after obtaining no objection letters from the other group), this Article shall cease to be operative and stand amended to that extent.


Article 9: The shares shall always be held by two groups viz. UP group and MP group. The UP group is headed by Shri Sanjay Gupta and MP group is headed by Shri Madan Mohan Gupta. In future the shareholders of a group may appoint anyone among themselves as the head of the respective group. The shares including additional shares shall be issued, subscribed and allotted at all times to both the groups in the ratio of 50 (MP group) : 50 (UP group) subject to Article 10.


Article 30: Subject to the provisions of Companies Act, 1956, in the first instance, the quorum for a general meeting shall be four shareholders present in person which shall include at least two shareholders/authorized representatives each of the two groups.


Article 43 : The Board shall at all times comprise of equal number of nominee directors of both the groups. However, the nominees of UP group and MP group shall always be from the family of late Shri P.C. Gupta and late Shri G.D. Gupta family.


Article 44 : No share qualification is required for a person to become a director of the company.


Article 45 : Independent directors and/or additional directors, if required to be appointed, shall always be subject to the prior approval of both the groups in writing.


Article 87 : Save as otherwise expressly provided under the Act, the questions arising at any meeting of the Board, shall be decided by majority of votes. Such majority shall include two nominee directors of each of the two groups.


Article 58 : The nominee of UP group shall always be the Chairman of the Board of Directors and Chief/Managing Editor and the nominee of MP group shall be the Managing Director and Editors and Resident Editor.


Article 63 contains various matters on which affirmative vote of minimum two nominee directors of each group is necessary.


Article 77 provides for arbitration in relation to any dispute, difference, claim, controversy or questions whatever between the two groups and the Articles also specifically provides that legal suit between the two groups is barred.


4. Shri Choudhary, Sr. Advocate appearing for the petitioner submitted : 40 per cent of the shares of the company are held by the 2nd respondent on behalf of UP group. In terms of Article 2(j), any corporate entity which holds shares on behalf of either of the two groups should be controlled with 51 per cent shareholding by the members of that group. In the same Article, the terms ?control? or ?controlled? have been defined to mean the power to direct the management operations and/or policies of the company. In other words, there should be exclusive control of the management of the shareholding company. Recently, 26 per cent shares of the 2nd respondent have been allotted to a foreign media group, namely, INMIL and further shares have been issued and allotted to public at large. The Articles of the company have thereafter been amended by which UP group which not only held more than 51 per cent in the 2nd respondent but also held complete control over it is no longer in full control of that company of 2nd respondent. Article 73(a) of the Articles of Association of the 2nd respondent, no general meeting can be held without the presence of a representative of INMIL and likewise in terms of Article 92 on various matters regarding the affairs of the company, the affirmative vote of INMIL is required. Thus, it is quite obvious that without the support and consent of INMIL, UP group cannot control the 2nd respondent. In other words, even though ever after the public issue UP group holds more than 51 per cent shares in the 2nd respondent, it has lost of its exclusive control over the 2nd respondent in respect of its management and also the Board. Of the 14 members on the board, only 5 are from UP group and the audit committee does not have any nominee of UP group. Therefore, since UP is no longer in exclusive control of the 2nd respondent, in terms of Article 2(j), it has become disentitled to hold the shares and as such its name has to be removed from the register of members of the company. In terms of section 111(4)(b) of the Act, since there is a delay in removing the name of the 2nd respondent from the register of members on its ceasing to be a member, the petitioners have moved this petition for rectification. In terms of section 111(7)(b) of the Act, this Board has the power to decide any question which is necessary in respect of rectification.


5. The learned counsel relied on the following cases in support of the submissions:


1. Bhupinder Rai v. S.M. Kannappa Automobiles (P.) Ltd. [1996] 86 Comp. Cas. 18 [1995] 3 SCL 291 (CLB - Mad.). In this case, it has been held that section 111(4) can be invoked not only in respect of transfer but also in respect of allotment of shares. Since in the present petition, the petitioners have sought for the removal of the 2nd respondent from the register of members on the ground that there has been a default in entering the register the fact of the 2nd respondent ceasing to be a member, they have the right to move this petition.


2. Advanced Law Lexicon - Vol.II -III 2005 Edition : The word ?direct? means ordering others in the way to a certain end. In the present case, the petitioners cannot direct the manner in which the affairs of the 2nd respondent have to be carried out as INMIL has veto powers in various matters in relation to the affairs of the company.


3. Smt. Claude-Lile Parulekar v. Sakal Papers (P.) Ltd. [2005] 59 SCL 414 (SC). Under section 155 of the Companies Act, one could seek rectification of the register of members by cancelling the name of a transferee. In the present case, the petitioners seek rectification of the register of members of the company by removing the name of the 2nd respondent.


4. Standard Chartered Bank v. Andhra Bank Financial Services Ltd. [2006] 68 SCL 109 (SC). Under section 111 of the Act, this Board has general jurisdiction to decide any question which is necessary or expedient to decide in connection with an application under this section.


5. Santosh Ajit Sachdeva v. Anoopi Shahani [2007] 7 SCC 675. To control a company, mere holding of majority shares is not sufficient but something more is required to prove that one is actually controlling and managing the business himself.


6. Shri Sarkar, Sr. Advocate appearing for the respondents submitted : This petition is not maintainable. Section 111(4)(1)(b) of the Act would apply only if there is delay or default in recording a transfer or transmission of shares. Further, this section can be invoked only when there is a delay or default on the part of the board of the company. In the present case, the alleged cessation of membership by the 2nd respondent was never brought before the board and as such the petitioners have no cause of action to file this petition. Section 111(7)(b) refers only to the powers of this Board to decide incidental issues that may arise but not the primary and basic question of maintainability. Further, the result of the prayer sought for by the petitioners would be that the share capital of the company would be reduced and this Board has no powers under section 111 to do so S.M. Kannappa Automobile (P.) Ltd.?s case (supra).


7. Dealing with the merits of the case, Shri Sarkar submitted : The UP group holding shares worth Rs. 10 lakhs in the company has funded the company with over Rs. 16 crores and also has given personal guarantee for over Rs. 1.5 crores in favour of the company. Thus, the UP group is vitally interested in the well being and profitability of the company. The MP group has instituted certain proceedings against UP group in Delhi High Court and the present case is in addition. A reading of Article 2(j) would indicate that the stipulation relating to control is applicable only to MP group and not to UP group. Even otherwise, in terms of Article 44, the board of the company can consist of only the nominees of UP group and MP group and if the prayer of the petitioner is granted, then, UP group cannot have any nominee on the board and Article 44 would become redundant. Similarly, Article 9 also stipulates that the shares of the company should be held only by the two groups-MP group and UP group and if the relief sought for is granted, UP group would cease to be a shareholder, thus, rendering Article 9 also redundant. Further, Article 2(j) is only a defining clause while other Articles, like 44 and 9 are operative Articles. The entire claim of the petitioner that UP group has lost its control is false as is evident from the fact that the petitioner was fully aware of the entry of the foreign shareholders even before the IPO. Members of MP group have congratulated UP group for the success of the IPO at which time they fully knew that INMIL had become a shareholder of the company (Pages 447 and 448). The claim of the petitioner that by inducting INMIL as a shareholder, the UP group has lost its control over the company is not correct. In the approval given by the Government of India on 24-5-2005 (Page 437), it has been specifically provided that the directors of INMIL shall not have any say in the editorial content or in the appointment of key executives/editorial staff. The same has been reiterated in the communication of the Government vide its letter dated 23-3-2005 (Page No. 429). Therefore, UP group does have control over the affairs of the company and none of the provisions relating to affirmative vote as in the Articles curbs the power of UP group from controlling the affairs of the company. In Sulpher Dyes Ltd. v. Hickson & Dadajee Ltd. [1995] 83 Comp. Cas. 533 (Bom.), it has been held that shares cannot be in existence without somebody exercising rights over the shares. In the present case, if the name of the 2nd respondent is removed from the register of members, there will be none to exercise rights over the shares held by the 2nd respondent. In British American Tobacco Co. Ltd. v. IRC [1943] A.C. 335, it has been held that the owners of the majority of the voting power in the company are the persons who are in effective control of its affairs and fortunes. In the present case, since the UP group holds more than 51 per cent of shares in the 2nd respondent, they are in control of the company. In Gordon Woodroffee & Co. Ltd., UK v. Gordon Woodroffee [1997] 97 Comp. Cas. 411 [1998] 17 SCL 343 (CLB - Delhi), the court has observed that only when a person holds more than 51 per cent shares in a company, he could be said to be in a position to control the affairs of the company.


8. The learned counsel further submitted : Section 111(4) of the Act does not cover a case where allotment was valid but due to some change in the status of a shareholder, he allegedly ceased to be a shareholder. In the present case, there is no complaint that at the time when the name of the 2nd respondent was entered in the register of members, the same was invalid. Subsequent change in the character of a shareholder cannot be a ground to seek rectification of the register of members. In Pioneer Protective Glass Fibre (P.) Ltd. v. Fibre Glass Pilkington Ltd. [1986] 60 Comp. Cas. 707 (Cal.), the court has held that a change in the name of a company does not mean that the earlier company ceased to exist. Similarly, in the present case, just because there is some change in the shareholding of the 2nd respondent, its status as a shareholder of the 1st respondent cannot be challenged. Further, the effect of the prayer sought by the petitioner would be that the shares would be forfeited. Articles 16 to 20 which relate to forfeiture do not cover an instance of a shareholder loosing the control of the shareholding company. Even otherwise, forfeiture can be made only by the company and not by an order of the Company Law Board. Article 2(j) has to be interpreted in an appropriate manner. This Article protects the interest of the 1st respondent company to ensure that the directors nominated by UP group belong to that group and nothing more. In other words, as long as the 2nd respondent nominates members of UP group on the Board of the company, it does not matter whether UP group has exclusive control over the affairs of the 2nd respondent or not. Since the UP group holds majority shares in the 2nd respondent and if the board of the 2nd respondent does not nominate the members of UP group on the board of the 1st respondent, UP group can always change the board of the 2nd respondent.


9. In rejoinder, Shri Choudhary submitted : The term ?control? as per Article 2(j) applies both to MP as well as UP group. The claim of the 2nd respondent that to control a company, 51 per cent shares is sufficient cannot be accepted in view of the various powers provided in the Article for affirmative vote by INMIL. Article 2(j) envisages uncontrolled power with the UP group in regard to the control of policies and management. In view of the amended Articles after INMIL became a shareholder, without its consent and concurrence, MP group cannot control the affairs of the company. Insofar as the arguments that provisions of section 111(4)(b) apply only in cases of transfer of shares is concerned, the same is not correct. Rectification can be directed even in cases other than transfer/transmission as is evident from the fact that section 111(4) has used the words ?including a refusal under sub-section (1)?. Insofar as the argument that the petitioner should first approach the board of directors for rectification and only if the board delays or refuses, then, the matter should come before the CLB is not correct as only CLB has the power of rectification and not the board. Further, even though the board of directors was aware that the UP group had lost its control over the 2nd respondent and thus has violated the provisions of Article 2(j), yet the board did not take any action forcing the petitioner to approach this Board. The claim that MP group was aware of the induction of INMIL as shareholder is not correct. Even assuming that MP group was aware, yet, it was never aware of the amendment to Articles providing for joint control.


10. I have considered the pleadings and arguments of the counsel. The maintainability of the petition has been questioned on the ground that section 111(4) of the Act applies only in cases of rectification of register in relation to transfer/transmission of shares. It is to be noted that before amendment to the Companies Act in 1988, the provisions of section 111 of the Act were part of two sections, namely, section 111 and section 155. While the present provisions of section 111(1) to (3) were a part of old section 111, section 111(4) to (9) were part of section 155. While old section 111 took care of the matters relating to transfer and transmission, section 155 dealt with rectification. When both the sections were assimilated into present section 111, it might appear that even section 111(4) would apply only to cases of transfer and transmission. This is exactly the contention of Shri Sarkar. This issue has been extensively discussed by this Board in City Bank N.A. v. Power Grid Corpn. of India Ltd. [1995] 83 Comp. Cas. 454 4 SCL 71 (CLB - Delhi), wherein it was urged that under section 111(4)(b), transfer matters cannot be agitated. This Board held that in view of assimilation of section 155 in section 111 and in view of the words ?including a refusal under sub-section (1)? even transfer matters can be agitated under that sub-section. The only criterion is that the name of a person should have been either entered or removed from the register of members without sufficient cause or that default is made or unnecessary delay takes place in entering in the register the fact of any person having become or ceased to be a member. Therefore as long as the grievance of a member or an aggrieved person or the company is that there has been a default or unnecessary delay in entering in the register the fact of any person having become or ceased to be a member, then, an application under section 111(4) can be made. Since in the present case, the petitioners allege that there has been unnecessary delay or default in removing the name of the 2nd respondent from the register of members of the company, the petition is maintainable under section 111(4)(b). Whether the claim is sustainable in facts of the case or not is not relevant while considering the maintainability in terms of section 111(4)(b).


11. Having said so, it is now necessary to find out whether there has been a default or delay on the part of the board of the company in removing the name of the 2nd respondent from the register of members of the company as only when such a delay or default is attributed to the Board on an application, the provisions of section 111(4)(b) can be invoked. Nothing has been produced before me by the petitioners, that, as members, either of them had sought for rectification of the register of members by writing to the company and that the board of the company had defaulted or delayed in taking a decision. The cause of action to invoke the provisions of section 111(4) of the Act would arise only when the fact of any member having ceased to be a member is brought before the company/board and the company/board defaults or delays in taking a decision. Since the petitioners have not approached the board of the company seeking for removal of the name of the 2nd respondent from the register of members, they have no cause of action to file this petition and as such I could dismiss the petition at the threshold which I do not propose to do as from the following it would be evident that the petition itself even otherwise a frivolous one and not sustainable even on facts and law.


12. The only ground on which rectification is sought is that the 2nd respondent has violated the provisions of Article 2(j), according to which, it should control not only 51 per cent shares in the 2nd respondent but also exclusively control its affairs. Shri Chaudhary cited the decisions in Anoopi Shahani?s case (supra) to urge that mere holding more than 51 per cent is not sufficient to hold that the holder is in the control of the company, while Shri Sarkar relied on the decisions in British American Tobacco Co. Ltd.?s case (supra) and Gordon Woodroffee & Co. Ltd.?s case (supra) cases to contend that once a person holds more than 51 per cent shares in a company, he is deemed to have control over the affairs of the company. None of these cases are relevant in the present case as when one interprets the provisions of an Article, it cannot be done in isolation but has to be considered along with relevant other Articles. As would be evident from other Articles of the company, the purpose of section 2(j), which is incidentally a definition Article, appears to be that the change of control of the shareholding company should not affect the interest of the company. The 2nd respondent could affect the affairs of the company only through its nominees on the board of the company or by exercising its voting rights in general meetings. From a reading of the various Articles, it is quite apparent that irrespective of whether UP group controls the affairs of the 2nd respondent or not, the 2nd respondent cannot act against or affect the interests of the company. Even though the 2nd respondent holds 40 per cent shares in the company with 50 per cent voting rights, the right of directorships in the company has been given only to the family members of PC Gupta of UP group and 2nd respondent cannot nominate anyone other than the family members of Shri P.C. Gupta. In other words, even assuming that UP group does not have exclusive control over 2nd respondent and is also not the majority on the board of the 2nd respondent, yet, none other than the family members of Shri P.C. Gupta can be nominated on the board of the company. Further, in terms of Article 44, no share qualification is required for directors. Further, the Article 2(j) does not talk of exclusive control but only talks of power to direct management, operations and policies of the shareholder company. Since the Articles of the 2nd respondent gives veto power to both to INMIL and the UP groups, without the consent and knowledge of UP group, even INMIL cannot act against the wishes of UP group, thus, clearly indicating that UP group still has sufficient control over the affairs of the 2nd respondent. This negative control is as good as having control over the affairs of the company.


13. Further, even as a shareholder, the 2nd respondent cannot affect the affairs of the company in the general meetings. Article 30 is specific that even to constitute the quorum, there should be two members each from both the groups. Therefore, I do not find any reason as to why the petitioners should seek rectification on the ground that the UP group has lost its exclusive control [Article 2(j) does not talk of exclusive con

Please Login To View The Full Judgment!

trol] over the 2nd respondent. 14. Shri Sarkar submitted, relying on Sulpher Dyes Ltd.?s case (supra) that no share can exist without someone exercising rights over the shares and if not it would amount to forfeiture. Shri Chaudhary relied on Sakal Papers (P.) Ltd.?s case (supra), to state that one can seek rectification for cancelling the name of a transferee. In that case, obviously, the name of the transferor will be put back in the register of members and as such the shares would not be in limbo. I do agree that shares cannot exist without someone exercising rights over the shares unless the shares are forfeited and the Articles of the company do not envisage forfeiture on the grounds taken by the petitioners. During the arguments, when Shri Sarkar pointed out that the removal of the 2nd respondent from the register of members would result in reduction of share capital, the power of which this Board does not possess, Shri Choudhary submitted that the shares would not be cancelled but would be allotted to others. In view of the provisions of the Articles, the shares cannot be allotted to any one at the discretion of the Board. In terms of Article 7, the shares in the company have to be held by both the groups in the ratio of 50:50 and in terms of Article 9, shares shall always be held by both the groups. Even additional shares have to be issued in the ratio of 50:50. Thus, even MP group cannot be allotted the impugned shares after removal of the name of the 2nd respondent. If at all the shares were to be allotted, it could be only to the family members of UP group in compliance with the provisions of Articles 7 and 9. Thus, the petitioners do not gain anything by way of seeking for the removal of the name of the 2nd respondent from the register of members as UP Group cannot be excluded either from the membership or the directorship of the company in view of the Articles. Further, the deletion of the name of the 2nd respondent, which is a part of UP group, and which holds all the shares meant for UP group would result in collapse of the substratum of the company in view of the various Articles unless the shares held by it are allotted to family members of UP group. 15. Thus, on an overall appreciation of the facts of this case, I find that the petitioners have not made out a case for rectification of the register of members and that in the facts and circumstances of the case, in view of the provisions of various Articles as indicated above, the name of the 2nd respondent cannot be removed from the register of members. 16. Accordingly, the petition is dismissed.
O R