Company Law Board
Smt. Usha Krishna Kumar, Shri Adarsh ... vs Aswati Inns Private Limited And Shri ... on 15 December, 2004
Equivalent citations: (2005)4COMPLJ157(CLB), [2005]62SCL303(CLB)
ORDER
K.K. Balu, Member
1. This company-petition is filed under Sections 397 and 398 of the Companies Act, 1956 ("the Act") alleging that the affairs of M/s Aswati Inns Private Limited ("the Company") are being conducted in a manner oppressive to the petitioners and claiming the following reliefs: -
(i) to direct the respondents to offer the petitioners proportionate representation on the Board of directors of the Company;
(ii) to appoint an independent Chairman of the Company for proper and regular conduct of meetings of the Board of directors as well as the general meetings of the Company;
(iii) to appoint a firm of Chartered Accountants for investigating the accounts of the Company;
(iv) to restrain the second respondent from functioning as a director of the Company and intermeddling with the affairs of the Company.
2. The main acts of oppression and mismanagement as alleged in the company relate to the following: -
(a) exclusion of the petitioners from day-to-day management of the Company;
(b) refusal of proportionate representation to the petitioners on the Board of directors of the Company;
(c) denial of benefit of interest to the petitioners on the investments made by way of unsecured loans for carrying on the business of the Company;
(d) diversion of the Company's funds for the benefit of the respondents;
(e) dismal performance of the respondents in carrying on the business of the Company without maintaining fair play and probity in the conduct of the affairs of the Company;
(f) non-sending of notices for the general or annual general meetings, non-holding of the annual general meetings and non-sending of annual accounts and reports of the Company.
3. Shri R. Shankaranarayanan, learned Counsel appearing for the petitioners, while initiating his arguments submitted as under: -
o The petitioners and the second respondent are family friends'. -The second respondent incorporated the Company in February, 1991 with the object of establishing hotels, inns etc. and accordingly established a hotel in Bangalore.
o The petitioners invested approximately 25 per cent of the equity capital amounting to Rs. 15,00,000/- and further advanced an equal amount of Rs. 15,00,000/- by way of unsecured loan which shall carry interest at 18 per cent per annum, on the assurance of the second respondent that the petitioners could become partners and that the spirit of partnership would be followed in carrying on the hotel business. The first petitioner was lead to believe that there would be possibility of active participation in the affairs of the Company at a later point of time. The communication dated 11.08.1993 by Chairman of the Company requesting for additional funds from the first ; petitioner to meet over run project cost would indicate that the respondents treated the petitioners as co-promoters. However, the petitioners are purposely excluded from the management of the Company. The specific request of the petitioners to induct their representatives on the Board of directors of the Company has been intentionally declined by the respondents in breach of the understanding that the petitioners would be in the joint management of the Company.
o The respondents have not been sending any notice of the annual general meeting or the balance sheet of the Company or any interest, in spite of the repeated demands made in writing by the petitioners. The respondents neither sent any written communication nor convened and held any meetings of the Company forcing the petitioners to demand the accounts and accrued interest on the unsecured loans extended by them, as borne out by a series of communications sent by the first petitioner (Annexures A5 to A11 and A14 to A16). The second respondent pursuant to the personal discussions had with the petitioner, undertook to set right the irregularities and further promised to repay the loan amount with interest. Accordingly, the respondents paid a sum of Rs. 7,50,000/- on 23.08.1999 towards repayment of unsecured loan in terms of Annexure-A12 and A13, however, denying any interest to the petitioners for the first time on the ground that the petitioners extended interest-free unsecured loan, which has been denied by the first petitioner in her various communications stated supra.
o The respondents failed in the hotel business which resulted in the increase of unsecured loans from Rs. 65 lakhs to 152.73 lakhs, and meagre reduction in secured loans by Rs. 55 lakhs, as borne out by the annual accounts for the year ended 31.03.1998. As per the original projections, the loans ought to have been liquidated and there must be a cash surplus of Rs. 83.8 lakhs/ which make the petitioners to apprehend that the second respondent has been siphoning off the funds of the Company.
o The first respondent Company is a private limited company with very few shareholders and the petitioners constituting 25 per cent of the paid-up capital of the Company, the principles of quasi partnership must be applied, more so, when the confidence between the petitioners and the second respondent formed the fundamental basis of the relationship between the parties. But the actual state of affairs is being concealed by the second respondent and thus exhibiting lack of fair play and probity in the conduct of the affairs of the Company. In these circumstances, the petitioners' interest would be safeguarded only when proportional representation is given to the petitioners on the Board of the Company. In the alternative, the petitioners are willing to sell their holding in favour of the respondents at a fair price which may be determined by an independent valuer who shall take into account the future business prospects of the Company. In this connection, Shri Shankaranarayanan referred to the offers received from some of the prospective buyers who are willing to pay as much as Rs. 2.10 crores towards consideration of the shares held by the petitioners in the Company. The Company shall repay balance of the unsecured loan with interest at 18 per cent on the entire loan amount till the date of repayment by the Company. Shri Shankaranarayanan, therefore, sought for appropriate directions.
4. Shri A. Murali, learned Counsel, appearing for the respondents opposed the company petition on the following other grounds: -
* The petitioners failed to make out prima-facie case of oppression of minority by the majority or mismanagement of the affairs of the Company warranting any interference by this Bench.
* The Company was incorporated to establish a hotel project at Bangalore by the second respondent and his parents, who are subscribers to the Memorandum and Articles of Association and are the first directors named in the Articles of Association of the Company. The Articles of Association of the Company do not speak about the right of the petitioners to be on the Board of the Company. The petitioners have never been treated as partners or co-promoters. There is no agreement or understanding that the petitioners or their nominees would be inducted on the Board of directors of the Company or the Company would be in the joint management of the petitioners or the sprit of partnership would be followed by the patties. There is no scope for the petitioners, being outsiders to come on the Board of directors of the Company. The petitioners have never been in the management of the Company and therefore the question of excluding them from the affairs of the Company does not arise. Furthermore, the respondents are unwilling to induct the husband of the first petitioner on the Board in view of his tarnished image which would adversely affect the Company's good will and reputation. By virtue of the letter dated I 1.08.1993 said to be sent by Chairman of the Company, the petitioners cannot claim that they are co-promoters as the signature in the said communication is found to be forged in comparison with the signature of the Chairman as contained in the Memorandum and Articles of Association of the Company. The second respondent having the requisite qualification and specialised skill has been managing the affairs of the Company as the Managing Director. The petitioners invested money after one year of incorporation of the Company, by which time, the hotel project was conceived and reached advanced stage of implementation.
* The land for the hotel project acquired on a long term lease basis at a cost of Rs. 48,00,000/- was entirely met by the family of the second respondent. The cost of construction and creation of infrastructure facilities are partly met out of the financial facilities availed from Karnataka State Industrial Investment and Development Corporation Limited (KSI1DC) to the tune of Rs. 125 lakhs and partly out of the funds contributed by the shareholders. The dues of KSIIDC are secured by personal guarantee of the second respondent and his parents and mortgage of their immovable property. KSIIDC stipulated among other conditions that any unsecured loan availed from the promoters or shareholders of the Company shall not carry any interest. Since the family of the petitioners and the parents of the second respondent are known to each other for a long period, the petitioners invested Rs. 30 lakhs in the Company subject to the condition imposed by the respondent group that a sum of Rs. 15,00,000/- would be treated as an unsecured loan. Accordingly, while the petitioners got 15,000 equity shares of Rs. 100/- each, the respondent group contributed Rs. 46,00,000/-; towards their equity shares. In view of the stipulation imposed by KSIIDC, the loan amount of Rs. 60,00,000/- brought in by the respondent group presently increased to Rs. 143 lakhs and the loan amount of Rs. 15,00,000/- by the petitioners reduced to Rs. 7,50,000/- have been treated as interest free unsecured loans. The respondents never agreed to pay any interest and much less interest at the rate of 18 per cent as claimed by the petitioners. According to the respondents, the letters dated 15.07.1992, 24.10.1994, 05.10.1995, 10.11.1995, 18.12.1996, 14.07.1997, 15.09.1998, 27.08.1999 and 22.10.1999 of the first petitioner are fabricated for purpose of the present company petition. Moreover, there is no documentary proof to show that these letters were sent to the respondents and received by them. These letters are self-serving documents and cannot bind the respondents. The Company never paid any interest on the unsecured loan as seen from the balance sheets produced before this Bench. The grievance of the petitioners on account of non-payment of interest is made in their capacity as creditors and no case of oppression qua-members has been made out by the petitioners. The petitioners failed to prove any misappropriation of funds of the Company by the second respondent.
* The annual general meetings of the Company are being regularly convened and held after due notices of such meetings to the petitioners. The Company is regular in forwarding the audited balance sheet and profit and loss account, directors report and auditors report to the petitioners. However, the petitioners did not choose to attend any meeting and never showed any interest in the affairs of the Company.
* The petitioners are only the investors and the present background of the first petitioner's husband could not be beneficial to the interest of the Company. However, respondents have no objection for the petitioners to continue as shareholders. In the alternative the respondents are willing to purchase the shares of the petitioner in the manner as prescribed in the Articles of Association of the Company.
5. Shri R. Shankaranarayanan, in his reply submitted as under: -
The petitioners are unaware of the arrangement between the Company and KSIIDC and any such arrangement does not prohibit the petitioner from claiming interest on the unsecured loan extended to the Company. The stipulations by KSIIDC were never brought to the knowledge of the petitioners in which case they would not have invested any amount by way of unsecured loan. Moreover, only promoters in the management of the Company and not shareholders would give interest free loans. The petitioners are denied not only representation on the Board, but also interest on the loan extended by them. The request of the petitioners to induct three of their nominees on the Board of directors of the Company was never considered by the respondents, in which event the respondents may purchase the shares of the petitioners at a fair market value which shall take into account the future prospects of the Company.
6. I have considered the pleadings and arguments of learned Counsel. The issues which arise for my consideration are whether the petitioners have made out a case under Section 397/398 of the Act and if so, whether the petitioners are entitled for the reliefs claimed in the company petition.
It is on record that the Company was promoted establishing a hotel in Bangalore by the second respondent and his parents subscribing to the Memorandum and Articles of Association who are the first directors named in the Articles of Association of the Company. The claim of the petitioners that they are co-promoters is not supported by the articles and there is no written agreement or understanding that the petitioners' nominees would be inducted on the Board of directors of the Company. The communications relied on by the petitioners, genuineness of which is under dispute, are of no evidenciary value to establish the petitioners' claim. At this juncture, KSIIDC sanction letter dated 29.02.1992, extending a term loan of Rs. 1,25,00,000/-, for setting Up of the hotel on the security of, inter-alia, personal guarantee of the second respondent and his parents assumes greater importance, the relevant recitals of Which read as under:-
"The promoters shall bring in a minimum of Rs. 135 lacs as their contribution towards the project of which Rs. 60 lacs shall be by way of equity share capital of the company and the balance of Rs. 75 lacs in the form of interest free unsecured loans. Further, of the contribution a minimum of Rs. 80 lacs (i.e. Rs. 60 lacs by way of equity share capital and Rs. 20 lacs by way of interest free unsecured loans) shall have been brought in and spent on the project to the satisfaction of the Corporation before seeking disbursement of the term loan from the Corporation. The unsecured loans shall not be withdrawn from the project during the currency of the term loan from KSIIDC."
It is clear from the stipulation of KSIIDC that the promoters shall bring in a minimum of Rs. 1,35,00,000/- as their contribution towards the project of which Rs. 60,00,000/- shall be by way of equity share capital and the balance of Rs. 75,00,000/- in the form of interest free unsecured loans. The balance sheet for the year 31.03.1993 reveals that the subscribed, issued and paid-up capital of the Company is Rs. 61 lakhs, out of which admittedly the petitioners invested Rs. 15 lakhs towards the equity share capital and the balance of Rs. 46,00,000/- represents the paid-up capital contributed by the respondent group. Furthermore, the balance sheet for the year ended 31.03.1993 discloses unsecured loans from directors amounting to Rs. 74,00,504/-, which include an amount of Rs. 7,50,000/- from the first petitioner and Rs. 7,50,000/- from the second petitioner respectively. Thus, the petitioners and respondent group brought in the project cost of Rs. 1,35,00,000/- as stipulated by KSIIDC. At present the unsecured loan extended by the respondent group stands increased to Rs. 143 lakhs. A combined reading of KSIIDC sanction letter and the balance sheet of the Company for the year ended 31.03.1993 would perhaps reveal some basic understanding between the parties that the petitioners would be treated as co-promoters of the Company and therefore the petitioners have justifiable claim of legitimate expectation of being on the Board of directors of the company. However, the very same unsecured loan taken from the petitioners is reflected in the balance sheet of the Company for the subsequent years ended 31.03.1994 to 31.03.2002 under the head "Unsecured Loans accepted from Others" and not from "directors" of the Company. I do not see any explanation from the Company for this differential treatment of the unsecured loan taken from the petitioners in the balance sheet of the Company for the subsequent years. If the petitioners are treated as co-promoters, as borne out by the balance sheet for the year ended 31.03.1993, they are not entitled for any interest on their investment brought-in in the form of unsecured loan. Conversely, if they are shareholders as contended by the respondents, the petitioners would be entitled for interest on the investment brought-in in the form of unsecured loan. The negative stipulation imposed by KSIIDC applies to contributions made by the promoters by way of unsecured loans and not to unsecured loans extended by any shareholder, in which case, the plea of the respondents must fail. Against this background, there is no need to go into any of the disputed letters relied on by the petitioners in support of their claim either the joint management of the Company or interest on the unsecured loan extended by them. The petitioners holding substantial stake are statutory entitled for notice of the annual general meting as well as the balance sheet of the Company. The assertion of the respondents that the Company has been regularly sending notice of the annual general meeting and balance sheet of the Company to the petitioners remains merely an assertion. The grievances of the petitioners on account of dismal performance of the Company, non-convening , of regular meetings of members of the Company, misappropriation of funds by the respondents do not merit any consideration in the light of, among other things, the progress shown in the business of the Company as borne out by Annexure R-14, which remains undisputed, the audited balance sheets for the years 1991-1992 to 2001-2002 on record and the offer made by outsiders to(the purchase the shares of the petitioners at a price of about Rs. 2.10 crores. Admittedly, at present the hotel business carried on by the Company is found to be a profitable venture. But there are differences and loss of trust between the parties. The petitioners have lost confidence on the respondents, as affirmed in the company petition. This leaves little scope for their co-existence in pursuing the hotel business and in my view they must part ways by the exit of one group by sale of their shares held in the Company. While the petitioners are desirous of joining the Board of directors of the Company along with the respondents group or selling their shares to the respondents at a fair value to be determined by an independent valuer, the respondents are dead against the proposal of the Company being in the joint management of the petitioners and the respondents group. It shall be borne in mind that it is only the respondent group which had taken the initiative to incorporate the Company and set up the hotel with financial assistance from KSIIDC against their personal guarantee. The respondent group has been in the exclusive management of the hotel. The petitioners are agreeable either for the joint management or for sale of their stake in the Company for proper consideration. Therefore, I am of the view that the petitioners shall sell their shares to the respondent group at a fair price which may be determined by an independent valuer. It may be observed that the procedure evolved under the articles for determination of the fair value, in my considered view, would be applicable only in case of voluntary transfer of shares. In the facts and circumstances of the present case, it would be most equitable only if the present and future prospects of the hotel business are also taken into account at the time of valuation of the fair value of the shares. Furthermore, the petitioners must be entitled for interest on the unsecured loan extended by them for carrying on the hotel business, of the Company for the reasons recorded elsewhere. It may be observed that KSIIDC charged interest 18 per cent per annum on the term loan extended to the Company apart from interest in the event of any default in payment of interest or repayment of, instalments or principal or both by the Company as stipulated in their sanction letter dated 29.02.1992. In view of the foregoing conclusions and in exercise of the powers of the CLB under Section 402, the following order is passed: -
(i) The Company shall repay to the petitioner the outstanding unsecured loan amount of Rs. 7,50,000/- availed by the Company together with interest at 18 per cent per annum from the date of availment of the' loan till settlement of the entire dues and further interest at the aforesaid rate on the closed unsecured loan amount of Rs. 7,50,000/- from the date of availment of loan till settlement, viz., 23.08.1999. This shall be done within 30 days of receipt of this order by the respondents.
(ii) Shri S. Giridharan, Chartered Accountant, Bangalore (Tel. No. 080-22235548; 22236391) is appointed to determine the value of the shares of the Company as on 31.03.2002 being the date proximate to the date of company petition. Both the petitioners and the respondents are at liberty to make their submissions before the valuer, who will take such submissions and the present and future business prospects of the hotel business of the Company into consideration while arriving at the value of the shares. The valuation made by the valuers shall be binding on both the parties. The entire valuation process shall be completed by 31.01.2005. Within a period of 30 days from the date of receipt of the valuation report, the respondents on receipt of the original share certificates together with the blank transfer forms from the petitioners, pay consideration for the shares at the value determined by the valuer. The Company will negotiate the fee payable to the valuer and shall bear the same.
With the above directions, the company petition stands disposed of. No order as to costs.