Dale and Carrington Investments (P) Ltd. v P.K. Prathapan and Ors (2004)

Dale and Carrington Investments (P) Ltd. v P.K. Prathapan and Ors (2004) Supreme Court of India, Appeal Civil. Case No: 5915-5916 of 2002

Bench: Ruma Pal & Arun Kumar

Facts of the Case

The matter arose between Ramanujam, appellant 2 and P.K. Prathapan and his wife Pushpa Prathapan, Respondent 1 and 2. Appellant 1 is a company that is engaged the business of hotel services in which all the parties of the case are shareholders, and the case is concerned with the control and management of the company. Hotel Siddharth located in Chalakudy, Kerela was up for sale for the total sum of Rs. 6 Lakhs (Rupees Six Lakhs Only), Prathapan, Respondent 1 was in interest in the offer and he therefore agreed to purchase the hotel with the assistance of Ramanujan, Appellant 2. The hotel was accordingly acquired in March, 1987, a sum of Rs. 6 lakhs (Rupees Six Lakhs) was required to be paid in cash to the vendors out of which Rs. 5 lakhs (Rupees five lakhs) was paid by Prathapan and a sum of Rs. 50,000 (Rupees Fifty Thousand) was invested by Muralidharan, brother of Prathapan. The rest of the amount came from other respondents. However, Ramanujam, Appellant 2 had not contributed any amount towards the initial payment but he offered to look after the business of the hotel on behalf Prathapan and his wife, Pushpa Prathapan. Ramanujam, Appellant 2 is the chairman and the managing director of the company alongside Muralidharan, brother of Prathapan and Suresh Babu, brother of Prathapan’s wife, who were taken as directors of the company. 5000 (five thousand) equity shares worth Rs. 5 Lakhs (Rupees Five Lakhs) were allotted in the name of Prathapan and his wife, 2500 (two thousand five hundred) each.

In 1998, Prathapan discovered that the authorized share capital of the company was increased from Rs. 15 Lakhs to Rs. 25 Lakhs and thereafter to Rs. 35 Lakhs. An advance of Rs. 3000/- for share capital pending allotment was shown until 1993 which was raised to Rs.6,68,500/- in 1994 in the balance sheet of the company. Further, in the meeting of the board of directors of the company that was allegedly held on 24^th October, 1994 and 26^th March, 1997 which was chaired by Ramanujam, Appellant 2. As per the minutes of the meetings of the board, 6,865 (six thousand, eight hundred and sixty-five) equity shares worth Rs. 6,86,500/- (Rupees six lakhs eighty-six thousand five hundred only) were allotted in favour of Ramanujam, Appellant 2. Prathapan claims he was never informed of the company’s increase in authorized share capital or the purported allocation of extra equity shares in Ramanujam’s favor.

Due to the alleged allotment of additional shares that was made in favour of Ramanujam, Appellant 2, Prathapan became a minority shareholder from the earlier position of the majority shareholder in the company. Prathapan challenged the alleged allotment of shares by filling a petition under Section 397 and 398 of the Companies Act, 1956 before the Company Law Board in July, 1999. The petition filed by Prathapan alongside his wife, Pushpa as co-petitioner challenge the alleged allotment of shares which was alleged to be an act of oppression on the part of Ramanujam who was the managing director of the company. The petitioners’ prayer was that the Company Law Board should pass an order to set aside the allotment of shares and make necessary rectifications in the register of members of the company. The Company Law Board found Ramanujam guilty of oppression, however, the Company Law Board offers Prathapan and his wife, Pushpa the option to sell their shares to Ramanujam and the prayer for rectification of the register of members was dismissed. Aggrieved by the order granted by the Company Law Board, Prathapan approached the High Court of Kerala to appeal the matter. The High Court took a look into the manner in which Ramanujam was handling the affairs of the company and found that the relief granted by the Company Law Board is prejudice and held Ramanujam guilty of oppression and fraud. The High Court ordered setting aside of allotment of shares made in the Board Meetings allegedly held on 24th October, 1994 and 26 March, 1997, to Ramanujam, the managing director of the company. The share register was ordered to be rectified accordingly. Aggrieved by the judgement of the High Court of Kerala, Ramanujam approached the Supreme Court.

Issues

The issues that revolve around the case were to determine;

1. The validity of allotment of the additional equity shares that made Ramanujam the majority shareholder and validity of the relief granted.

2. Whether the allotment was done with bona fide intentions.

3. Whether there was a director’s fiduciary duty towards the shareholders of the company.

Arguments

Appellant 2 through his counsel argued that the Articles of Association of the company provides the Board of Directors with an absolute power to issue additional share capital and increase the authorized share capital of the company. The Board of Directors of the company exercised this power while increasing the authorized share capital and the further issuance of shares in favour of the Appellant 2, therefore, the same cannot be challenged.

Respondent 1 and 2 countered that Appellant 2 by virtue of issuing additional shares in his favour has breached his fiduciary duties by acting in his own interest and not in the interest of the company and its shareholders. The Respondents also alleged that the Appellant 2 has siphoned off the funds of the company for his personal gains. According to Respondent’s counsel, both the Respondent 1 and 2 were kept completely in the dark about the affairs of the company throughout and that both Respondent 1 and 2 never received a penny towards dividend on the shares held by them in the company. It is also the case of Respondent 1 that he continued to provide financial support to the company by sending money to Appellant 2 from time to time.

Court’s Analysis

The Supreme Court analyses that according to the balance sheet of the company, there was no any profit made by until about 1991-1992, for the first time, the sum of Rs. 3000 (Rupees Three Thousand) profits was shown on the balance sheet of March, 1993. Till 31^st  March, 1993 towards the share capital allotment only sum of Rs. 3000 (Rupees Three Thousand) was in the record. However, as per the balance sheet of 31^st March, 1994 a sum of Rs. 6,86,500 (Rupees Six Lakhs, Eighty Six Thousand Five Hundred Only) was shown as the profit made by the company.

The Supreme Court found that various Articles of Association of the company were violated by Ramanujam, Appellant 2, such as Article 4(iii) which prohibits any invitation to the public to subscribe for any shares or debentures of the company, Article 10 provides that allotment of shares “shall exclusively be vested in the Board of Directors, who may in their absolute discretion allot such number of shares as they think proper and Article 38 which requires that the directors present at the board meeting shall write their names and sign in a book specially kept for the purpose. These provisions of the Articles of Association of the company have shown that the board of directors has an absolute discretion in the matter of allotment of shares. But in this case, the decision of allotment of shares in favour of Ramanujam was solely made by himself as the other director on the board of the company denies his presence in the meeting allegedly held. Furthermore, the Ramanujam did not produce a notice of the meeting or a record of the minutes to substantiate that it had taken place. The Court was inclined to assume that there was no board of directors meeting on that particular date due to the lack of any documentation or evidence to support that claim. Consequently, the issue of Ramanujam’s share allocation is resolved. Therefore, the purported allocation of extra business equity shares to Ramanujam is completely unlawful and unapproved and needs to be revoked.

The Supreme Court emphasizes that the company as a legal entity must typically act through the board of directors, an individual director does not have the authority to act on behalf of the company, unless specified which was not in this case. The board of directors of the company has been conferred with fiduciary duty to act upon with bona fide intention, due diligence, and utmost care. The act of reducing the status of the majority shareholder to a minority shareholder by misrepresentation was considered as an oppressive act by the Court. It was established that the action taken by the managing director, Ramanujam was with mala fide intention, such action taken cannot be upheld and must be set aside. Furthermore, the Supreme Court stated that “the sole remedy to be provided in this case is to reverse the benefits obtained by Ramanujam through his manipulations and fraudulent actions.”

In the case of Alexander v. Automatic Telephone Co., (1900) 2 Ch. 56 at page 66-67, it was held that “The Court of Chancery has always exacted from directors the observance of good faith towards their shareholders and towards those who take shares from the company and become co-adventurers with themselves and others who may join them. The maxim “Caveat emptor” has no application to such cases, and directors who so use their powers as to obtain benefits for themselves at the expense of the shareholders, without informing them of the fact, cannot retain those benefits and must account for them to the company, so that all the shareholders may participate in them.”

Judgment

The Supreme Court examined the allotment of additional shares, wherein due to lack of evidence supporting the decision made on the allotment of the additional shares concluded the allotment to be invalid. The judgment stated that “it is inevitable that neither the allotment of additional shares in favor of Ramanujam was bona fide nor it was in the interest of the Appellant company nor a proper and legal procedure was followed to make the allotment. The motive for the allotment was malafide, the only intention being to gain control of the company.” Therefore, the shares allotted to Ramanujam were set aside by the Supreme Court, and rightly so.” The allotment of all the additional shares in favor of Ramanujam has to be set aside.

Conclusion

The judgment was given based multiple facts that were brought into consideration before Supreme Court which unfortunately neither the Company Law Board nor the High Court considered. The case of “Dale and Carrington Invt. P. Ltd. And … vs P.K. Prathapan And Others” is a landmark judgment that deals oppression and mismanagement claim and also highlights the importance of directors’ fiduciary duties and the need for adherence to proper procedures in corporate actions. It serves as a reminder that directors must act in good faith and in the best interests of the company and its shareholders, ensuring transparency and fairness in their decisions and actions.

References

Dale And Carrington Invt. P. Ltd. And … vs P.K. Prathapan And Others on 13 September, 2004, IndianKanoon.

The Companies Act, 1956, Sec 10F, 81, 397 – 398.

Sakshi Shankara & Ankita Mishrab, Dale and Carrington Investments (P) Ltd. v P.K. Prathapan and Ors., Jus Corpus Law Journal, Feb 2022

Dale and Carrington Investments (P) Ltd v P.K. Prathapan and Ors. (2005) 1 SCC 212

Abhay Shetty & AaryaPachisia, ‘Analysis of Dale and Carrington Investments (P) Ltd v PK Prathapan and Ors. – (2005) 1 SCC 212’ (Taxguru, 21 October 2020)

The Companies Act, 2013, s. 166(2),

The Companies Act, 2013, s. 241

Alexander v. Automatic Telephone Co., (1900) 2 Ch. 56 at page 66-67