Company Law Board
Shri Jiwan Mehta vs Emmbros Metals Pvt. Ltd. And Ors. on 20 November, 2007
Equivalent citations: [2008]143COMPCAS245(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 82 of 2004 filed by Sh. Jiwan Mehta (the petitioner) under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as the "Act") against Emm7bros Metal (P) Ltd. & others (Respondents) alleging that in an illegal manner and fashion the R-2 & 3 have reduced the petitioner's shareholding to about 8% from 16.33% by issuance of the additional 51,50,000 fully paid up equity shares; the books and records of the respondent company were fabricated by the Respondents; the petitioner was removed from directorship; the R-2 &3 in order to personally benefit and to the detriment of the other shareholders have valued the goodwill of the said partnership at Rs. 475 lacs.
2. The undisputed facts of the case are: Emmbros Metal (P) Ltd. and Ors., (R-1) was incorporated on 18th January 1991 having its registered office at Village Katha (Baddi) Tehsil - Nalagargh, Distt- Solan (Himachal Pradesh). The present authorized share capital of the Respondent company is Rs. 35,00,000/- divided into 3,50,000/- equity shares of Rs. 10/- each and its present issued, subscribed and paid up capital is Rs. 35,00,000 divided into 3,50,000 fully paid up equity shares of Rs. 10/- each. The main objects of the company are (a) to manufacture, buy, sell exchange, import, export and deal in electric and electronic components goods, equipments, accessories, systems, spares & appliance for household, industrial, educational, agricultural," medical, defence and other appliances, metals and metallic sheets, wires, cables, ferrous and non ferrous sheets, brass sheets, hardware, auto parts, chemicals tools and instruments and to work as engineers.
3. The family of Mr. T.D. Mehta consisted inter alia, six sons, namely Mr. Jiwan Mehta, Mr. Mohinder Mehta, Mr. Ramesh Mehta, Mr. Raj Mehta, Mr. Harish Mehta and Mr. Ashok Mehta. Mr. T.D. Mehta had set up three companies where all the brothers had cross holdings, besides the holdings of their father, Sh. T.D. Mehta. Each company was managed by two set of brothers as follows:
Name of Company Managed By Emmbros Wires & Strips Ltd. Mr. Jiwan Mehta & Mr. Ramesh Mehta Emmbros Forgings P. Ltd. Mr. Raj Mehta and Mr. Mohinder Mehta Emmbros Metals P. Ltd. Mr. Harish Mehta and Mr. Ashok Mehta
After the demise of Mr. T.D. Mehta on 25.06.1996, during early August, 1997, all the brothers arrived at an oral understanding and, inter alia, agreed to be independent and fully own/run the companies managed by them and also to remove the cross shareholdings over a period of time. Accordingly, the shares held by Mr. T.D. Mehta in all the three companies were transmitted amongst the brothers in the proportion that each brother managing the particular company got the higher shares of that company. Consequently, in 2000, four brothers, namely, Raj Mehta, Mohinder Mehta, Harish Mehta and Ashok Mehta swapped their shareholdings and removed the cross holdings in the companies managed by them. Also during 2001, Ramesh Mehta who was managing the EWSL with the Petitioner swapped the cross holdings. Thus, all brothers swapped shares but only the Petitioner did not swap the shareholding. The Petitioner made a disproportionate allotment in the company owned by him on 18.8.1997 (immediately after oral understanding), Emmbros Wires & Strips Ltd. This was not objected to by any of the other brothers as it was as clearly agreed between them. Mr. Jiwan Mehta was not the subscriber-director of the Company as per the Memorandum & Articles of Association of the Company. He was inducted on the Board of the Company on 22.6.1995, i.e., after about 4 years of the incorporation of the Company. On 7.10.2001, all the brothers entered into a written agreement (MOU) understanding to incorporate the oral understanding already existing between them, as per Clause VIII of the Memorandum of Understanding (hereinafter referred to as "MOU") which reads as under:
That the oral agreement mutually agreed between all the brothers has been rendered in writing to avoid any disputes or differences in the future As per this MOU, subject to the other terms and conditions contained therein, all the brothers agreed to swap their cross-shareholdings in the three companies so that each company shall exclusively belong to each two set of brothers as set out in the table above. All the brothers, except the Petitioner swapped the shareholdings. The swapping of the shares was to be done and no valuation was fixed for the shares.
4. Sh. U.K. Chaudhary, Counsel for the respondents raising preliminary objection on maintainability of the petition pointed out that the petitioner has not come to the Court with clean hands and has concealed material information, the family settlement (MOU) was not disclosed to the Company Law Board. Having agreed to swap the shares without consideration as per the MOU, the Petitioner who has not swapped the shares is holding the shares in trust for the Respondents and hence, is not qualified under Section 399 of the Companies Act, 1956. He cannot take benefit of his own wrong. The allotments, swapping, vacation of office was with full knowledge, consent/acquiescence of the Petitioner and hence past and concluded transactions cannot be challenged. Hence, there is waiver and he is estopped in law from challenging his vacation and/or allotment of shares. My attention was drawn to the misstatements at para 8(i), (xiii), (xxi) which have stated by way of an affidavit but are unsubstantiated.
5. Sh. U.K. Chaudhary, Counsel for the respondents pointed out that on 29.2.2000 and 24.4.2000, the Company made allotment of shares in favour of Mr. Harish Mehta, Mr. Ashok Mehta and their family members. The company was in need of funds to grow as is clear from the minutes of the meeting held on 20.1.2000. Besides, Mr. Jiwan Mehta vacated his office from the Directorship on 24.4.2000 under Section 283(1)(g) of the Companies Act, 1956 for not attending three consecutive meetings of the Board as it was agreed MOU vide R-1 (and prior oral understanding) that he will not have any role in R-1. Further, the cross holdings in the Company were also removed with all the brothers swapping their shares as per the MOU except Mr. Jiwan Mehta, which is an admitted position. Mr Jiwan Mehta is talcing advantage of his own wrong. On 8.5.2000, Jiwan Mehta inspected the office of ROC and has admitted in his rejoinder that he came to know about the allotments and his vacation on that date as well. Further, the MOU was written on 7.10.2001, about 18 months from the date of first allotment on 29.2.2000, second on 24.4.2000 and his vacation as a director. The written MOU was about 17 months after the Petitioner inspected the ROC file and was fully aware of the allotments and his vacation from office of director. Hence, the allotment of shares as well as the vacation of the Petitioner as a Director which have been challenged was well within the knowledge of the Petitioner and he had acquiesced to such transaction. It was argued that it is therefore, a case of consent and concurrence and acquiescence and waiver and Jiwan Mehta is estopped in law from challenging the allotment of shares or his cessation as a director. The Respondent No. 1 is a profit making company and has never defaulted in the repayment to any of the financial institutions. It is an ISO-9000 accredited. Further, it has been granted SB-I rating by State Bank of India consistently for the last 7 years which is the highest rating granted by the Bank. In the meantime, the company managed by Jiwan Mehta became sick and he also made various diversions of funds in the said company. In 2004, after a gap & delay of about 4 years, Mr. Jiwan Mehta has challenged the allotment of shares, swapping of shares and his vacation of office of director as illegal and has preferred a Petition under Sections 397 & 398 of the Companies Act, 1956 before the Company Law Board, Principal Bench, New Delhi after full knowledge and acquiesce to the alleged transactions.
6. Responding to the contention that Partnership Principles are applicable between all the brothers in all the companies the counsel for the respondents argued that this is factually incorrect and is a mis-statement. It has been admitted by the Petitioner in paragraph 8(i) of the Petition that EWSL was "owned" by him. Thus, there was an agreement that the companies will be managed independently by two set of brothers. There is no such agreement of equal shareholdings as alleged. No agreement was produced on record. The partnership principles if any, were broken after the demise of the father on 25.6.96 when, during early August 1997, all the brothers transmitted the shares held by their father in the three companies in such a manner that each set of two brothers managing the particular company got fractionally higher shares. On the contrary, the Petitioner himself had made disproportionate allotment in the Company managed by him, i.e., Emmbros Wires & Strips Ltd. in the year 1997 whereby the shareholdings of all the other brothers was reduced which was not objected to by any of the brothers as it was well understood that each company will be managed and owned by each set of brothers. Consequent to the oral understanding during 1997 and 2000, all the brothers, except the Petitioner swapped the shareholdings which was formally recorded in the written family settlement (MOU) on 7.10.2001. Therefore, the partnership principles were ended in 1997 itself. This is a totally different stand from the allegation and is, therefore, a wrong statement made before the Hon'ble Board. On the contrary, the companies were to be exclusively managed. The MOU dated 7.10.2001 only recorded the earlier oral understandings which were existing in 1997 after the death of the father in 1996. This has been made amply clear by MOU (R-1). Surprisingly, the Rejoinder is totally elusive about this allegation. The Petitioner, therefore, is not interested in the company and only wants to harass the Respondents as his own company EWSL has been made sick by his own financial indiscipline.
7. Further, regarding the allegation that the allotments made on 29.2.2000 & 24.4.2000 are illegal to reduce his holding from 16.66% to 8.10%, allotments done at the back of the Petitioner and no notice of meetings was given, it was argued that all the brothers have entered into an MOU on 7.10.2001 as per which all the brothers agreed that they will not have any role in companies being managed by each set of brothers and will swap the cross-holdings without consideration. The MOU was written 18 months after the allotment during which period there was on oral understanding between the brothers as is clear from Clause VII of the MOU. Petitioner admitted that he inspected office of ROC on 8.5.2000 in his reply and came to know of the allotments, etc. He did not object to allotments for over 4 V2 years. Himself allotted disproportionate shares in his own Co. EWSL way back in 1997 which was not objected by other brothers as EWSL as per the intent was to exclusively belong to the Petitioner. As per the MOU, the intent was that R-l will exclusively belong to R-2 and R-3. Thus, the allotments were made with full knowledge, consent and acquiescence of the Petitioner. Now the petitioner is challenging past and concluded transactions to which Petitioner had acquiesced. Petitioner did not disclose MOU in Petition, but admitted in Rejoinder. It was argued that the Petitioner thus has not come to the Board with clean hands.
8. Further, as regards the allegation that the allotment of shares on 29.2.2000 and 24.4.2000 is in violation of AOA and Companies Act, 1956, it was pointed out that it is incorrect. The partnership principles already ended in 1997. Further, my attention was drawn to Clause 5 of AOA which reads as under:
The Shares shall be under the control of the Directors who may allot or otherwise dispose of the same to such persons at such terms as the Directors may think fit and to give any person any shares whether at par or at a premium and for such consideration as the Directors may think fit.
It was pointed out that Section 81(1A) of the Companies Act is not applicable to a private limited company. Thus there was no impediment- legal or contractual to the said allotment.
9. Further, as regards the allegation that the Petitioner was wrongly removed as a director and no notice of the Board Meetings was given, it was pointed out that the company was incorporated in 1991 and the Petitioner joined the Board as director on 22.6.1995. The partnership principles way back in 1997 and it was agreed that the each set of brothers will manage one company as mentioned in para 3 above. This oral understanding was reduced to writing on 7.10.2001, i.e. about 18 months after the Petitioner vacated his office and this fact was fully in knowledge of the Petitioner as admittedly the Petitioner inspected the ROC records on 8.5.2000 and knew about his vacation. The Petitioner vacated the office on 24.4.2000 for not attending the three consecutive Board Meetings on 20.1.2000, 24.2.2000 & 1.4.2000. The minutes of these meetings were duly held and confirmed in the next Board Meetings as is evident from the minutes of the meetings. Therefore, the vacation from office was not at the back of the Petitioner, but was with his full knowledge and acquiescence. The notices of the Board Meetings were given by hand delivery to the directors. Even in the case of Emmbros Wires & Strips Ltd., which was managed by the Petitioner and where the Respondent Nos. 3 was a director, the notice of board meetings were given to them by hand, as the brothers were residing close by in the same locality. The Respondents also issued the notices of board meetings by hand delivery as per the practice in all the companies where the brothers had cross holdings. It was the petitioner who chose not to attend the Board Meetings of the Respondent Company. He abandoned the company as he had no interest in Respondent Company, the partnership principles, if any expressly ended in 1997. Moreover, the Petitioner fabricated an Opinion Report which was to be furnished to the Bank by including his share in the house from 50% to 90% on account of which it was decided not grant him the leave of absence.
10. As regards the petitioners' allegation that the R-l was the parent company of EWSL, it was argued that this is factually incorrect. As per MOA/AOA, T.D. Mehta and Harish Mehta (R-2) were the subscribers/promoters. Petitioner was inducted on Board on 22.6.1995.
11. The counsel for the respondents pointed out that the allegation that swapping is on account of collusion between other brothers, is a wrong and factually incorrect statement. Moreover, the other brothers against whom allegations of collusion is made have not been impleaded as a party in this Petition. One brother is his own co-owner of his company itself. The partnership principles, if any, ended in the year 1997 and the written MOU was entered into on 7.10.2001 apparently for avoiding disputes. The clause contemplates the existence of oral agreement. As per the MOU, all the brothers, except the Petitioner swapped the shareholdings. Mr. Ramesh Mehta who was exclusively managing EWSL with Petitioner has also swapped, except the Petitioner. Further, no valuation of the shares which were to be swapped was done and it was agreed to release the cross holdings without any consideration. The Petitioner is now only trying to extract money from the Respondents by challenging past and concluded transactions done with his consent, knowledge and acquiescence.
12. Further, it was argued that as regards the allegation that the company was not in need of funds when allotments were made on 29.2.2000 & 24.4.2000, this has not been alleged in the pleadings. R-l is a growing company has been consistently rated SB-1 by SBI for the last more than 7 years as the sales and profits have grown. Even in 2003, the sales were Rs. 6.00 crores as compared to Rs. 4.83 crores in 2002. Before the challenged allotments, the need for funds for expansion was duly considered at the Board Meeting held on 20.1.2000. The minute book was produced before the Hon'ble Board.
13. Further, responding to the allegation that the respondents are trying to enforce MOU before the Hon'ble CLB by referring to the same and this cannot be legally enforced before the Hon'ble Board, it was argued that the Respondents have nowhere sought to enforce the MOU before the Hon'ble Board. The reference to MOU has been made by the Respondents only to demonstrate that all the alleged allotments/vacation of office of director of the Petitioner was with the full knowledge, consent and acquiescence of the Petitioner. In the MOU it has been specifically agreed that each set of two brothers will manage a company and will swap the cross holdings. The allotments, swapping, etc. were made pursuant to the oral understandings which was subsequently reduced to writing. The Respondents, by reference to the MOU only wish to submit that the Petitioner does not have a case that the allotments, swapping, vacation of the office was done at the back of the Petitioner, but was wish his full knowledge and acquiescence.
14. Further, replying to the allegation that the MOU was kept in abeyance by the Respondents, it was argued that the petitioner is trying to twist the facts. It was Jiwan Mehta (Petitioner) who has not fulfilled various conditions of the family settlement (MOU). Like in the present petition, even in proceedings before the Hon'ble Punjab & Haryana High Court the Petitioner had not disclosed the family settlement (MOU). Even presuming otherwise for the sake of arguments, the fact is that allotments, swapping etc., were made after full knowledge and acquiescence of the Petitioner as is clear from the family settlement (MOU) and of the admitted inspection of ROC records by the Petitioner on 8.5.2000, i.e., after the allotments. If the Petitioner has not acted upon the family settlement and wishes the same to be acted upon, he could have filed a suit for specific performance, which he has not filed. Just because he did not act on the settlement does not mean that his knowledge and acquiescence do not exist. The fact remains, that there was a family settlement (MOU) and all allotments, swapping etc. were with full knowledge and acquiescence of the Petitioner.
15. Further, replying to the allegation that the Respondent No. 2 was involved in day to day functioning of EWSL, it was argued that EWSL was under the control and management of Petitioner and Ramesh Mehta. The other brothers were guarantors for loans availed in EWSL and also directors. On account of various diversions of funds and mismanagement by the Petitioner, EWSL became a sick company and the financial institutions recalled the loans and initiated recovery proceedings before DRT. The Petitioner continued with the diversion of funds belonging to EWSL. Being a guarantor, the Respondent No. 2 had to protect his interests and stop the Petitioner from diversion of funds and had to even issue a public notice in this regard.
16. The counsel for the Respondents pointed out that allegation regarding mismanagement/diversion of funds are only bald allegations. R-1 rated as SB-1 by SBI, which is the highest rating- to a borrower. ISO 9000 company, is into profits since second year of operation, i.e. 1994-95. On the other hand, Petitioner himself diverted the funds and made his company, i.e. EWSL sick, whereas the respondent company has grown under the management of respondents.
17. As regard the allotment made on 1.10.2005 not disclosed at the hearing on 29.11.2005 and petitioner's prayer that proposed IPO be stayed, it was pointed out that the Petitioner's counsel was provided with the copy of minutes and Form No. 2 of allotment by UPC on 9.3.2006, Speed post dated 19.4.2006 and by hand on 12.6.2006 of all the allotments including the allotments made on 1.10.2005. The Petitioner's counsel who was present at the hearing on 12.6.2006 gave a signed receipt of the same. The Petitioner did not challenge the said allotment made on 1.10.2005 till 9 months from coming to know of the same and despite full knowledge and only challenged the same in December, 2006 when Respondent No. 1 proposed a public issue, in order to extract money from the Respondents by threatening them of a prolonged litigation and hence, creating hindrance for the IPO.
18. Further, regarding submission of wrong stock statements with the Bank, it was pointed out that the allegation is not substantiated. Bank has not been impleaded as a party. The Respondent No. 1 is enjoying SB-1 rating by State Bank if India which is the best rating. Nothing on the record to this effect, and the same is a bald averment.
19. Regarding the petitioners' allegation that some documents are forged, it was pointed out that the petitioners have also alleged that some of the documents are forged. However, no particulars, and any documentary support have been provided. Thus the same is liable to be ignored.
20. Sh. Sarkar and Sh. Rohit Choudhary, Counsels for the petitioner argued that the Respondent Nos. 2 & 3 without giving any notice to other shareholders of the company and also without offering such shares to the existing shareholders, allotted additional shares to their respective wives and thus Respondent Nos. 2 & 3 along with their wives came into holding about 92% of the entire shareholding of the company and in addition thereto, the Respondent No. 2 & 3 in collusion with the other shareholders, except for the petitioner swapped their shareholding in the petitioner company and thus consolidated their holding in the respondent company in an illegal manner reducing the petitioner's shareholding to about 8% from 16.33%, as held by the petitioner since incorporation of the Respondent company. It was further pointed out that the respondents during the pendency of the present petition and without disclosing the said fact before this Hon'ble Board, allotted further shares to themselves to the tune of 51,50,000 fully paid up equity shares of Rs. 10/-. The said allotment was made by the Respondent on 1-10-2005, thereby reducing the petitioner's shareholding to less than 1% in the company from approx 8% during the pendency of the petition. The said fresh shares were issued by the Respondents to themselves or their wives, without any cash. Admittedly the consideration of said shares is stated to be transfer of:
1. Rs. 475 lacs by way of goodwill of a partnership firm named "Emmbros Exports; and,
2. Balance by merging the said partnership firm name "Emmbros Exports" with the respondent company.
The fact regarding by issuance of the additional 51,50,000 fully paid up equity shares came into light only on the petitioner finding that the Respondent company has filed a 'draft prospectus' for public issue of equity shares with the SEBI.
21. The counsel for the petitioner while responding to the Respondents' allegation that there was an oral agreement between the brothers in May, 2000 and thereafter the same was reduced to writing by way of MOU dated 7.10.2001, argued that the said submission made by the Respondents is a false submission and without any basis for the reasons, firstly, had there been any oral understanding by way of which the Respondent company was to be only belonging to the Respondent Nos. 2 & 3 and the petitioner was to run the other company, namely, Emmbros Wires and Strips Limited (EWSL), then there was the question of Respondent's issuing a public notice dated August 2001 wherein the Respondent No. 2 have specifically stated that petitioner has no right to deal with ESWL. Clearly, it was argued, this demonstrates that the Respondent's contention that there was any oral settlement is without any basis. Secondly, the issuance of fresh equity/additional shares, which are duly admitted to by the Respondents in their reply, were made on 29th February, 2000 and 24th April, 2000 which is again prior to the alleged oral understanding and accordingly the Respondents had no right whatsoever to issue any additional shares in the Respondent company in order to reduce the shareholding of the petitioner. Thirdly, the Respondents themselves filed an application before the Hon'ble High Court of Punjab and Haryana, wherein the Respondents alongwith other brothers have made the following categorical statement with regard to the alleged MOU before the filing of this petition:
7. That Jiwan Mehta petitioner has concealed the fact that though a family settlement was entered into according to which, subject to his fulfillment of other conditions mentioned therein, the said house was to fall to his individual independent share, yet the said family settlement remained in abeyance on account of non-fulfillment by Jiwan Mehta of his part in the said settlement by way of payment of various amounts to the present applicants and also on account of his non-fulfillment of other obligations. Jiwan Mehta has, therefore, deliberately concealed and not placed on record the family settlement entered into. A copy of the same is attached herewith as Annexure-A with this application. It is reiterated that this family settlement was not acted upon and House No. 939 sector 8, Panchukula continues to be in the ownership of Jiwan Mehta and Ashok Mehta who are owners in equal shares of the said house." Consequently, the Hon'ble High Court ordered vide order dated 18.3.2004 that all six brothers including respondents, pursuant to their undertaking, to pay their respective shares in settling the liabilities of Emmbros Wires & Strips. The acceptance of the above order shows, the contentions of the Respondents in not acting upon the MOU in the year 2004 itself thus nullifying the same. It was argued that the above said averment made by the respondents and other brothers of the petitioner clearly demonstrates that the said MOU was never acted upon by them and as such there arise no question of the Respondents 2 & 3 coming into control of the respondent company. Fourthly, it was argued that the Respondent No. 2 himself filed a suit before the Court of Ld. Civil Judge, Panchkula seeking partition of house No. 939 sector 8, Panchkula. As per the terms of the MOU, the said house was to solely belong to the petitioner. Additionally, in a statement made on 13.10.2006 by one of the respondents, it is admitted that he is unaware of the MOU and its terms and conditions which surprisingly form the prime defense of the respondents against the petition. That being so, it does not lie in the mouth of the respondents to contend that the MOU was acted upon or anything pursuant to MOU has happened and the said MOU is of no consequences whatsoever. Besides, there are other terms of the MOU which have not been executed and remain unfulfilled to the extent that the same have been executed. Fifthly, it was contended that it is settled legal position and as upheld by this Hon'ble Board in catena of cases that such MOU cannot restrict the rights of a shareholder to approach this Hon'ble Board under the provisions of Section 397/398 of the Companies Act. In view of the above, the contention without regard to MOU is neither tenable in fact ox in law and the same is devoid of any merit and thus liable to be rejected.
22. As regards illegal increase in shareholding, it was argued that in view of the submissions made relating to "Memorandum of Understanding and effect thereto, if any" the Respondent's have no right whatsoever to change the nature and character of the Respondent company or to increase their shareholding to the detriment of the petitioner and reducing the petitioner to minority as against the petitioner being an equal shareholder in the Respondent company, which was being run and managed in the nature of 'partnership' with all six brothers holding equal shareholding therein. Hence, the prayer to restore the shareholding pattern, as it existed in the year 2000, more particularly in the manner as set out in para 8(iii) of the petition. It was further pointed out that the Respondent's h even paid any amount for the further issue of shares to the tune of 51,50,000 equity shares issued on 1st October 2005. On their own admission in the 'draft prospectus' the Respondents have admitted that "Emmbros Export" was being run from the premises of the respondent company itself and the entire resources of the respondent company were being used by the said partnership firm. It was pointed out that it is surprising to note that while the respondent company has been carrying on business for last 16 years and the said partnership firm came into existence only in the year 2002, the Respondent Nos. 2 & 3 in order to personally benefit and to the detriment of the other shareholders have valued the goodwill of the said partnership at Rs. 475 lacs which clearly shows that the Respondent Company's affairs are managed in an unfair manner and the Respondents ought to be removed from conducting the affairs of the Respondent company and the day-to-day management of the Respondent company and be directed to be conducted by an independent person, in the interest of the company and its shareholders.
23. Further, it was argued that the books and records of the Respondent Company were fabricated by the Respondents. It was pointed out that the respondents have submitted that they do not possess the Minutes Books of the company of the year before 2000, which is the same year in which the first illegal issuance of shares was made to themselves and their wives. It is pertinent to point out that pursuant to the orders of this Hon'ble Board dated 7.4.2005, the Respondents produced the books of the company on 29.11.2005. While the Respondents contended that the company had made allotment of 51,00,000 shares on 1.10.2005, however records produced before this Hon'ble Board did not show any such allotment ever been made. In fact a categorical statement was made by the counsel for the Respondent that the company has not made any further allotment after the allotments made on 29.2.2000 and 24.4.2000. Further the said statement was made on the basis of original records made available to this Hon'ble Board. Clearly, the records produced by the Respondents were false and fabricated.
24. My attention was drawn to the Director's meeting dated 24.4.2000, wherein it is mentioned that the petitioner absented from three meeting dated 20.1.2000, 24.2.2000 and 1.4.2000 and is thus removed from directorship. It was pointed of that there was no meeting of Board of Directors held on 24.2.2000, in as much as perusal of minutes of meeting 29.2.2000 reveals that Board's meeting prior to the said date was held only on 20.1.2000. The Respondents have forged and fabricated such resolutions only with malafide intentions of ousting the petitioner from Directorship and also for consolidating their shareholding. In addition thereto, no notice whatsoever were produced before this Hon'ble Board regarding calling of the said meetings. It was further admitted by the Respondents in their reply that the petitioner only came to know of such meeting after the petitioner inspected the records at the Registrar of Companies, Jallandhar. It was reiterated that the petitioner was not given any notices by the Respondent Company. It was pointed out that even as per the minutes of Board of Directors meeting held on 29.2.2000 and 24.4.2000, certain shares are allotted by the Board of Director. The said meeting is only attended by both respondent Nos. 2 & 3, who are also the beneficiary of such allotment. Clearly, it was argued, such meetings are invalid in view of the fact that only interested directors are present in such meeting. That being so, the allotments made pursuant to such meetings are even otherwise null and void ab initio.
25. Further, my attention was draw to financial mismanagement by pointing out that a perusal of the draft prospectus filed by the Respondent company before the SEBI, the following facts were admitted by the Respondents, which clearly lead to only conclusion that the Respondent Nos. 2 & 3 along with their wives are financial mismanaging the company and enriching themselves. The Respondent's have not even paid any amount for the further issue of shares to the tune of 51,500,000 equity shares issued on 1.10.2005. It is worthwhile to mention that on their own admission in the 'draft prospectus' the Respondents have admitted that "Ernmbros Export" was being run from the premises of the Respondent company itself and the entire resources of the Respondent company were being used by the said partnership firm. It is surprising to note that while the Respondent Company has been carrying on business for the last 16 years and the said partnership firm came into existence only in the year 2002. Respondent Nos. 2 & 3 in order to personally benefit and to the detriment of the other shareholders have valued the goodwill of the said partnership at Rs. 475 lacs. This clearly shows that the Respondent company's affairs are managed in an unfair manner and the Respondents ought to be removed from conducting the affairs of the Respondent company and the day-to-day management of the Respondent Company be directed to be conducted by an independent person, in the interest of the company and its shareholders. Besides this the Respondents siphoned off the business of the Respondent company by transferring the business to the said partnership firm and such act of the Respondent company is detrimental to the interest of the Respondent company and its other shareholders including the petitioner.
26. Considering the pleadings and the documents filed therewith as well as the arguments in this case, I find that the petitioners have not been able to refute the preliminary objections raised by the respondents on the maintainability of the petition. The preliminary objections raised are tenable in the background of the facts and circumstances of this case. Similar preliminary objections in another petition of the same petitioner in C.P. No. 60 of 2004 against respondent company (being one of the companies covered by the alleged MOU and said to be owned and managed by one set of brothers) and other respondents have been considered and disposed of my order dated 20/11/2007. The facts and circumstances of the case as well as the legal submissions on maintainability of the petition being the same as in C.P. No. 60/04, I find no reasons to make me decide this petition differently. It is true that as on date neither the petitioner nor the respondents want to rely on the oral agreement mutually agreed between all the brothers in May 2000 and later reduced to writing on 7.10.2001 apparently to avoid disputes. In the MOU it has been specifically agreed that each set of two brothers will manage a company and will swap their cross holdings in the three companies so that each company shall exclusively belong to each two set of brothers. It is also true that the allotments, swapping etc. (except by the petitioner) were made pursuant to the oral understanding as early as on 27.7.2000. The petitioner's contention that the scope of Section 397, 398 is completely different from that of the family settlement as in the former, it is the right of the petitioner as a shareholder and the internal affairs of the company which is in issue, whereas, family settlement deals with the rights of various members of the family in diverse properties of the family including the company is correct but the respondents have successfully demonstrated that the swapping of the shares was with the full knowledge, consent and acquiescence of the petitioner. The petitioner has deliberately concealed the MOU from the Company Law Board. The respondents' allegation that the MOU was concealed from the Hon'ble Punjab and Haryana High Court deliberately not placing the family settlement entered into on record and, in fact, the MOU had to be kept in abeyance due to the non fulfillment of the obligations and non-swapping of shares by the petitioner which is a part of record with the higher court is also true. The petitioner's contention that the MOU was never acted upon is also incorrect. The respondents' allegation that the petitioner has not come with clean hands had turned out to be true. The petitioner is allegedly guilty of misappropriation. Emmbros Wires and Strips is a company controlled by the petitioner, which had several cases before the Debt Recovery Tribunal. The factory has been sold to pay of the debts. The respondent contributed equally to discharge the debts.
27. It has been repeatedly emphasized in several decisions that family settlements are governed by a special equity and are to be enforced if honestly made. The terms may have been agreed to on the basis of an error of the parties or originate in a mistake or ignorance of fact as to what the rights of the parties actually are, or of the points on which their rights actually depend. This is because the object of an arrangement is to protect the family from long drawn out litigation, and to bring about harmony and goodwill in the family. The Court leans heavily in favour of family arrangements. Further, I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Co. LJ 336 (Karn) : (1991) 72 Comp Cas. 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd. 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands." The petitioner has not come with clean hands. This petition deserves to be dismissed on this ground alone. Furthermore, the petition suffers from delay and laches. Swapping of share was done on 27.7.2000. His vacation of office from director under Section 283(1)(g) was also as early as on 24.4.2000 the petitioner had reached the Registrar of Companies office for inspection of records on 8.5.2000 but the petition has been filed only on 31.8.2004. There has been considerable delay in making this petition. Even if the provisions of the Limitation Act are not applicable to the proceedings before the Company Law Board yet there is an abnormal delay in bringing the matter before the Company Law Board and on this ground alone, the petition should be dismissed. Further, there is no plea for condoning the delay and laches on the part of the petitioners in initiating proceedings before the Company Law Board. Besides, the allotments, swapping, vacation of office was with the full knowledge, consent/acquiescence of the petitioner who cannot challenge past and concluded transactions. The principles of estoppel, wavier and acquiescence also apply in this case. Further, it is noted that the petitioner has made an allegation regarding his removal as director but his prayers in the petition do not include any prayer seeking his restoration as director in the respondent company.
28. In view of the foregoing, the petition is not maintainable. I find no justification to consider the arguments on merits. The petition is hereby dismissed. All interim orders stand vacated. All CAs stand disposed of. No order as to cost.