Company Law Board
Shri G. Govindaraj And Smt. G. ... vs Venture Graphics Private Limited, Shri ... on 30 September, 2004
Equivalent citations: [2005]128COMPCAS632(CLB), [2005]57SCL141(CLB)
ORDER
K.K. Balu, Member
1. The petitioners constituting more than one-tenth of the total number of members of M/s Venture Graphics Private Limited ("the Company") have filed this company petition under Sections 397, 398, 402 and 403 of the Companies Act, 1956 ("the Act") alleging serious acts of oppression and mismanagement in the affairs of the Company and seeking the following reliefs:
(a) to declare that the first petitioner continues to be a director of the Company;
(b) to declare that the third and fourth respondents have not been validly elected as directors of the Company; and
(c) to surcharge the second respondent in terms of Section 406 of the Act read with Schedule XI by ordering an investigation in relation to the affairs of the Company.
2. Shri R. Murari, learned Counsel, while initiating his arguments submitted that the Company was formed in the year 1989 with main objects of carrying on the business of reprographics, design creations, making animations, photo type setting including computer software programmes etc. While the petitioners together hold 7500 equity shares of Rs. 10/-each, the respondent group is holding 92.14% of the paid up share capital of the Company. The first petitioner has been the director since the year 1990 and Chairman from the very inception of the Company. The second respondent who became an additional director in the year 1995, continued on the Board, but failed to take any initiative to convene the annual general meeting for the past three years and further excluded the first petitioner from the management and administration of the Company denying, among other things, access to the books of account of the Company. The Company by virtue of doing job work for certain foreign companies had received $ 1,87,030.5, which were misutilized by the second respondent to form new companies viz., M/s Venture Infosys Private Limited (VIPL) and M/s Venture Acqua Tech Private Limited (VATPL), of which he is the Managing Director and further diverted the business of the Company to his newly formed companies. The. second respondent opened an account with HDFC Bank, without obtaining any approval from the Board of Directors, for the purpose of clearing his personal debts. The second respondent siphoned off the money from the Company's account maintained with Corporation Bank, as borne out by the bank account statement for the period between 07.08.2000 and 06.02.2002 (pages 64 to 70 of company petition), reflecting payments made to, inter alia, certain financiers in respect of the loans personally availed by the second respondent, VATPL, the third respondent, self cheque withdrawals etc. running into several lakhs of rupees, for his personal benefit, save occasionally towards salary expenses, thereby prejudicing the interest of the Company and minority shareholders. An amount of Rs. 5 lakhs received by the second respondent while vacating the premises of the Company from the land lord is not accounted in the books of account of the Company. The employees of the Company after imparting training at huge costs have been transferred to VIPL, adversely affecting the efficiency of the Company. The averments made in paragraph 12 of counter statement that the operations of VATPL were stopped with effect from 1997 are belied by the bank account statement, (page 64 of company petition) according to which the Company had issued a cheque bearing No. 0581871 of Rs. 50,000/- in favour of VATPL, which was found to be debited on 09.08.2000 in the Company's account. The advertisement brought out by VIPL in the issue dated 09.05.2004 of the Hindu, shows that VIPL is engaged in E-publishing or pre-press services, in competition with the Company. The categorical averment made in paragraph 19 of counter statement that no staff was transferred from the Company to VIPL, runs parallel to the affidavit sworn on 02.07.2004 by the second respondent to the effect that "a minority of the employees of VIPL are former employees of the Company". Shri Murari, learned Counsel relying on the certificate dated 1.9.12.2003 issued by M/s K. Sahayaraj, Chartered Account, Chennai, extracted from the bank statement issued by Corporation Bank for the period between 22.07.2000 and 23.07.2002 reiterated that the second respondent had drawn huge cash from the account without any justification and misappropriated the same for his personal benefits. Though the respondents could explain utilization of certain foreign remittances received by the Company, yet there is no explanation or justification for the entire foreign inward remittances received by the Company. The second respondent illegally convened an extraordinary general meeting without any notice on 05.04.2002 of the meeting to the second petitioner and without any prior Board meeting for approving the proposal to hold the extraordinary general meeting, wherein the third respondent, his wife and fourth respondent, his brother-in-law were elected as directors of the Company, in spite of the objection made in writing by the second respondent, with malafide intention to exclude the petitioners from the management of the Company. None of the minutes of any of the meetings of the Company viz. Board meetings or general or annual general meetings are initialed or signed at each page and they are not dated and signed at the last page, by the first petitioner, as Chairman in terms of Section 193, in which case the legal presumption as provided under Section 195 cannot be drawn as held in Micromeritics Engineers Pvt. Ltd v. S. Munusamy - 2002 (3) CTC 661. Shri Murari, learned Counsel referring to copies of the annual general meetings held on 29.09.1995, (pages 15-21),15.09.1999 (pages 25 and 27) and on 14.11.2000 (pages 29 to 31 of Vol. 1-A) contended that the signatures of the first petitioner as Chairman are forged. In the absence of any concrete proof, the appointment of the third respondent and fourth respondent as directors is neither valid nor binding on the petitioners. The first petitioner did not sign the balance sheet for the period as at 31.03.2001 and the original balance sheet with the purported signatures of the first petitioner filed before this Bench is a fabricated document. The second respondent resorted to the scanning of the first petitioner's signature from some available document and reproduced the same as if the balance sheet was signed by the first petitioner. The second respondent by a letter dated 14.05.2002 intimated the first petitioner that he ceased to be a director since he was not reappointed as a director of the Company, at the eleventh annual general meeting said to have been held on 27.11.2001 on expiry of his term, which amounts to an act of oppression. His removal cannot be true in the light of the fact that the first petitioner was drawing his remuneration till February, 2002; that he was signing cheques even subsequent to the annual general meeting and further that the Company continued with one director since November 2001, contrary to article 35 contemplating the minimum number of two directors. Moreover, no Form No. 32 has been filed with the Registrar of Companies regarding cessation of the first petitioner from the post of director of the Company. The first petitioner is therefore entitled for his remuneration from February 2002 and his grievance in regard to the directorship must be remedied, in support of which Shri Murari placed reliance on the following decisions:
J.C. Augustine v. Remanika Silks (P) Ltd - (2001) 1 Comp LJ 347 B.M. Jain and Sons Co. (P) Ltd. v. Bombay Cable Car Company (P) Ltd. - (2001) 1 Comp LJ 468 Ador-Samia Limited v. Indocan Engineering Systems Ltd. - (2000) 3 Comp LJ 307 - to show that directorial complaints have been entertained by the CLB in cases of family companies in the guise of quasi-partnerships and on equitable consideration depending upon the facts of each case.
3. Shri V. Ramakrishnan, learned Counsel raised a preliminary objection that there are no pleadings to the effect that the facts of the present case would justify the making of a winding up order on just and equitable grounds, but such winding up of the Company would unfairly prejudice the petitioners, as stipulated in Section 397 (2) (b), in support of which relied on the following decisions:
Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. - 2001 Vol. 105 CC 493 Shanti Prasad Jain v. Kalinga Tubes Ltd. - 1965 Vol. XXXV CC 351.
Maharashtra Power Development Corporation Ltd. v. Dabhol Power Co. - (2003) 5 Comp LJ 1 The petitioners having failed to plead their case falling within Section 397, cannot now be permitted to adduce evidence as held in Kalinga Tubes, Ltd v. Shanti Prasad Jain - (1964) I Comp.LJ 117, wherein it has been held that for the purpose of determining whether the petition should be granted or not, the allegations in the petition must be looked at and cannot be traversed beyond that. No order could be made if sufficient cause is not alleged in the petition, even if such a case is proved in evidence. The case under Sections 397 and 398 must be determined with reference to facts transpiring on the date of the presentation of the petition and on the basis of averments made in the petition itself. The petitioners cannot prove the requirements of Section 397 (2) (b) without any such averments made in the company petition. Hence the company petition must be dismissed in limini. Shri V. Ramakrishnan, learned Counsel, on merits contended that the foreign inward remittances, utilization of which is seriously disputed by the petitioners, are disclosed in the bank account statement for the period between 01.06.2001 and 01.12.2001 (pages 74 - 79 of Vol.II tiled by respondents). The Company's balance sheet for the year ended 31.03.2001 as well as 31.03.2002 shows the export turnover of Rs. 58.33 lakhs and Rs. 46.57 lakhs respectively. These accounts indicate that the foreign inward remittances have been used for the purpose of the Company and that they could not have been used for the purpose of VATPL, since it was incorporated as early as in May 1994, much prior to the period of the foreign inward remittances received by the Company. All money transactions relating to the Company are duly accounted in the books of account and audited from time-to-time. The balance sheet and profit & loss account of the Company for the years ended 31.03.1999 and 31.03.2001 have been signed by the first petitioner, as a director of the Company and are estopped from contending that the second respondent is guilty of diversion of funds of the Company. The petitioners have not produced any material to establish that the Company ever maintained any account with HDFC bank. The Company used to borrow money from private financiers for its business needs, as reflected in the balance sheet for the years ended 31.03.2001 and 31.03.2002 (pages 43 & 63 of Vol. II filed by respondents), which include some of the financiers mentioned in the company petition. The payments made to the financiers detailed in the company petition are towards repayment of the loans taken by the Company, receipt of which is reflected in the ledger account maintained by the Company giving details of the cheque numbers and name of the Bank, which tally with the entries found in the bank account statement. The ledger account of the respective financiers (pages 81 to 84 of Vol. II filed by respondents) reflects the receipt and repayment of the loan amount by the Company. All self cheques drawn by the second respondent during the financial year ended 31.03.2001 and subsequent years have been duly and properly accounted in the audited financial statements for the respective years. The first petitioner having signed the financial statements for the year ended 31.03.2001 cannot now question the self cheques drawn during the year ended 31.03.2001. The Company borrowed Rs. 50,000/- by cheque from VATPL on 11.07.2001, through transfer of accounts which was repaid through cheque payment. The loan transaction with VATPL is duly reflected in the balance sheet for the year ended 31.03.2001 signed by the first petitioner and is binding on him. The Company had received only Rs. 4 lakhs to vacate the office premises from the landlord in two instalments of Rs. 2.5 lakhs in December, 2001 and Rs. 1.5 lakhs in July, 2002 which are properly accounted for in the books of account of the relevant financial year and utilised towards repayment of the loan obtained from Indian Bank by the Company, as borne out by the copy of the ledger account of the Company and the bank account statement (page 96-98 of Vol.II filed by respondents). There is no denial of payment of Rs. 10,320/- by the Company made on 17.12.2001 in favour of the third respondent by way of bonus. Shri Ramakrishnan, learned Counsel pointed out that similar such payment was made to the first petitioner on 10.11.2001 as borne out by the cash voucher (page 95 of Vol.II filed by respondents). According to the respondents, no staff member of the Company was transferred to VIPL. However, due to lack of business and stoppage of business offers from overseas, most of the staff members voluntarily resigned from the Company and further during March, 2002, the remaining few staff members left at the informal request of the Company. Shri V. Ramakrishnan, learned Counsel pointed out that the employee turnover in the information technology industry is always very high. VIPL is not an exception. Thus, a few of the former employees of the Company joined VIPL on their own accord, which cannot constitute an act of oppression. VATPL is engaged in shrimp hatchery business since 1993-94, much prior to the active participation of the second respondent in the affairs of the Company. However, VATPL stopped its operations with effect from 1997 due to set back in the shrimp hatchery industry, VIPL engaged in software development and services is registered with Software Technology Parks of India and is not involved in any graphics or E-publishing or pre-press services, in which the Company is involved. VIPL is not involved in any business competing with that of the Company. According to Shri Ramakrishnan, learned Counsel, E-publishing business carried on by the Company is related to pre-press services, such as type setting, graphics and art work. The Company used to prepare these type set, graphics and art work electronically over the computer eliminating the manual process. The main clients of the Company are book publishing houses and advertising agencies, whereas the business carried on by VIPL relates to data conversion and providing technical documentation services primarily in the medical and aerospace fields. VIPL is primarily operating as an offshore outsourcing unit and does not offer any pre-press services and does not deal with book publishers or publishing companies. Against this background, Shri Ramakrishnan, learned Counsel pointed out that the advertisement issued by VIPL relates to only data conversion, technical documentation services business which are nothing to do with the business carried on by the Company and further pointed out that none of the clauses in the memorandum of association of the Company used the word "E-publishing". None of the clients of the Company is the client of VIPL. Thus, the business of the Company at no point of time has been diverted to any of the business concerns of the second respondent. According to Shri Ramakrishnan, learned Counsel the allegations of misappropriation and diversion of funds as well as business of the Company by the second respondent for his personal benefits being drastic in nature, no definite conclusion on the allegations of financial irregularities can be given merely on the basis of prima facie opinion especially when, the respondents have defended each of the allegations, as held in K.P. Balakrishnan Nair v. Vindya Tea & Industries (P.) - Ltd. - (1999) 32 CLA 160. The burden of proof for establishing the allegations of oppression; financial misappropriation etc. is on the petitioners and not on the respondents to dispute these allegations, in support of which learned Counsel referred to the decision in Srihari Rao v. Sri Gopal Automotive Limited - (1998) 4 Comp LJ 140. In the present case, the petitioners have not proved by proper evidence any of the charges levelled against the respondents and not entitled for any relief. The extraordinary general meeting was convened pursuant to the requisition made by the shareholders to consider the appointment of additional directors by restructuring the Board. The Board of directors at the meeting held on 08.03.2002 had resolved to convene the extraordinary general meeting on 05.04.2002, as seen from the minutes of the Board of directors of the Company (page 91 of Vol.IA filed by respondents). Accordingly, the extraordinary general meeting was convened on 05.04.2002, as borne out by the copies of the attendance sheet and minutes of the extraordinary general meeting (pages 106-108 of Vol.II filed by respondents). The majority shareholders holding 92.14 per cent of the paid-up capital of the Company, in their wisdom at the extraordinary general meeting duly elected the respondents 3 & 4 as directors. In this connection, Shri Ramakrishnan relying on Winfred Investments Limited v. Mainstay Teleservices Private Limited - 2004 CLC 844 pointed out that it is the prerogative of the shareholders to chose their own directors and that the exercise of democratic power cannot be termed as an act of oppression or mismanagement. The attendance sheet and the minutes of the extraordinary general meeting carry the signatures of among others the first petitioner, which is not disputed. Though the petitioners are denying the signatures of two of the other shareholders, namely, Shri Rajasekar and Shri Anantha Kumar, the petitioners have not chosen to obtain and produce any affidavit from the said shareholders. Moreover, the petitioners have not established as to how the appointment of respondents 3 & 4 as directors by majority shareholders would cause prejudice to the interests of the Company or public interest. Learned Counsel further pointed out that the first petitioner was appointed at the annual general meeting held on 28.12.1991 for a period of four years and again appointed at the annual general meeting held on 28.09.1995 for a period of three years. Thereafter, the first petitioner was again appointed at the annual general meeting held on 17.08.1998 for a period of three years till the conclusion of eleventh annual general meeting of the Company. The term of the first petitioner came to an end in 2001. At the 11th annual general meeting held on 27.11.2001, no resolution for his appointment was moved since the petitioner had already lost confidence of the majority shareholders and the Board of directors. At the same time the first petitioner did not offer himself for reappointment as a director at the annual general meeting, thereby he ceased to be a director since 27.11.2001. Even if the extraordinary general meeting was not held on 27.11.2001, it is settled law that a director would cease to hold office on the last date on which the annual general meeting ought to have been held as held in the decision of In re S.R.Y. Ramakrishna Prasad - (1963) XXXIII CC 548. This decision cannot be confined to directors retiring by rotation, but would also apply regardless of whether directors retire by rotation or additional directors or directors retire in accordance with the terms of the appointment. In the present case, the first petitioner would have ceased to hold the office of director on 30.09.2001, the date on which the eleventh annual general meeting ought to have been held. Shri Ramakrishnan, learned Counsel further pointed out that directorial complaints will not normally be entertained in petition under Sections 397 and 398 as in the case of quasi-partnerships, where the partnership principles would apply. There has been no prior partnership between the petitioners and respondents. It is not the case of the petitioners that the Company is a family company or is run on quasi partnership basis. The plea of quasi-partnership could neither be entertained in the absence of any pleadings to that effect as held in In re S.R.Y. Ramakrishna Prasad. The Supreme Court in Kilpest P. Limited v. Shekhar Mehra - (1996) 87 CC 615 held that the plea of a limited company should be treated as a quasi-partnership should not easily be accepted. Therefore, the first petitioner cannot claim for his continuance as a director and for his remuneration. Merely because the minutes of the Board meetings and general meetings are not maintained in accordance with the provisions of the Act, such minutes do not become false. Shri Ramakrishnan, learned Counsel pointed out that the minutes of the Board and general body meetings held since the inception of the Company were never signed by the Chairman of the Company and cannot therefore be ignored as invalid. If these minutes are held to be invalid, every act of the Company carried out pursuant to the minutes of such meetings would remain invalid. Even if the presumption as contemplated under Section 194 cannot be drawn in respect of the various minutes of the Board and general minutes on record, yet they can be relied upon for adjudicating the disputes before the CLB. Shri Ramakrishnan, learned Counsel, while concluding his submissions reiterated that the petitioners have failed to establish any misappropriation of funds by the second respondent; any irregularity in the cessation of the first petitioner as a director as well as appointment of the respondents 3 & 4 as directors of the Company, in which case, no relief as claimed by the applicants could be granted by the CLB. In these circumstances, the petitioners have no option but to sell their shares at a reasonable valuation, which would be according to the petitioners less than the face value. Nevertheless, the second respondent is prepared to purchase 7,500 shares held by the petitioners at the face value of Rs. 10/-per share, which would work out at Rs. 75,000/-. The petitioners are already paid Rs. 40,000/- in terms of the order of this Bench. The respondents are ready and willing to pay the balance amount of Rs. 35,000/- to the petitioners, upon which they should transfer their entire shareholding in favour of the second respondent. The petitioners must either hand over the two-wheeler belonging to the Company in their custody which is valued at Rs. 20,000/- or in the alternative the second respondent would adjust the value of two-wheeler from and out of the balance of amount of Rs. 35,000/- in full and final settlement of the disputes between the petitioners and the respondents.
4. Shri Murari, learned Counsel, in his reply contended that by virtue of Section 397(1), the petitioners are to establish that the affairs of the Company are conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, upon which, the CLB under Sub-section (2) of Section 397 is to form an opinion as to whether the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that winding up of the company would unfairly prejudice the petitioners, complaining of oppression, but that otherwise the facts would justify the making of a winding up order on just and equitable grounds, as held in Shoe Specialities P. Ltd v. Standard Distilleries and Breweries P. Ltd. - 1997 (Vol.90) CC I. In the case of Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd., according to Shri Murari, learned Counsel it is categorically laid down (page 495) that the petitioners complaining of oppression must make out a case for winding up of the Company on just and equitable grounds. Similarly the decision in Shanti Prasad Jain v. Kalinga Tubes Ltd. emphasizes that it is not enough to show that there is just and equitable cause for winding up of the company, though that must be shown as preliminary to the application of Section 397; None of these decisions enunciates the principle that there must be pleadings to the effect that the existing facts would justify the winding up of the company on just and equitable grounds, by which members would unfairly be prejudiced. Learned Counsel further drew support from Shoe Specialities P. Ltd v. Standard Distilleries and Breweries P. Ltd -1997 (Vol. 90) CC 1 to substantiate his plea that "When a case of oppression is made out under Section 397 of the Companies Act, 1956, it is only within the power of the Company Law Board to end the matter complained of and to make such orders as it thinks fit," and Delstar Commercial and Financial Ltd v. Sarvottam Vinijaya Ltd. - (2001) 3 Comp. LJ 442 - to show that "The Company Law Board does have, in exercise of its equitable jurisdiction, the discretionary power to do justice between the parties in the manner it considers fit with a view to protect the interest of the shareholders and the company. This Board always takes into account events which arise after filing of the company petitions for the purpose of moulding appropriate reliefs. Shri Murari, learned counsel referred to the decision of the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd - (1982) 1 Comp. LJ1 to show that even in cases where oppression is not established, with a view to protect the interest of the company and the shareholders, suitable order could be passed in exercise of the equitable jurisdiction conferred by Section 397. While dealing with decisions cited on behalf of the respondents, Shri Murari, learned Counsel, pointed out that the decision in re S.R.Y. Ramakrishna Prasad (Supra) is in regard to the situation, where the director retires by rotation. This is however is not applicable to the present case, where first petitioner does not retire by rotation, as envisaged in Article 38 of the Articles of Association of the Company, according to which directors of the Company are not subject to retirement by rotation. In the case of Sri Gopal Automotive Limited, (supra) though it is laid down the burden of proof lies on the person making allegations of fraud etc., to prove such allegations yet it is categorically held in para 23 of the judgment that atleast some details must be given in a case of allegation of misapplication or siphoning off funds. In the instant case, the petitioners have furnished much more details in regard to the financial irregularities in the affairs of the Company. In the light of the decision in K.P. Balakrishnan Nair v. Vindya Tea & Industries (P) Ltd., (Supra), it is not possible to give any definite conclusion on the allegations of financial irregularities, without the original documents, in a proceeding under Section 397 / 398. However, in the instant case the petitioners have established beyond doubt the acts of oppression and mismanagement at the instance of the second respondent, entitling for the reliefs claimed by them. Shri Murari, while concluding his submissions reiterated that the CLB is empowered to order an investigation into the affairs of the Company under Section 237 and surcharge the second respondent in terms of Section 406 read with Schedule XI for any misappropriation of funds of the Company.
5. I have considered the pleadings and arguments of learned Counsel. Before dealing with the rival claims, it would be appropriate to consider the preliminary objection of the respondents on the maintainability of the company petition for want of the pleadings as to the fulfillment of the requirements of Section 397(2)(b). A plain reading of the provisions of Section 397 reveals that the CLB may under Sub-section (2) of Section 397, with a view to bringing to an end the matters complained of, make appropriate order, on an application made by any members empowered under Section 399, complaining that the affairs of the Company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, if the Company Law Board is of the opinion -
(i) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members;
(ii) that the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up; and
(iii) that the winding up order would unfairly prejudice the members.
For the present, to determine the preliminary issue, the issue whether the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members is not relevant, but only the other aspect whether the facts of this case before me would justify the making of a winding up order of the Company on just and equitable grounds and further whether the winding up order would unfairly prejudice the petitioners. In order to be successful on the latter ground, the Supreme Court in Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. (supra), after considering the provisions of Section 397 held that "the petitioners have to make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners." A careful consideration of the findings of the Supreme Court, suggests that in order to be successful on the ground specified in Section 397(2)(b), the petitioners have to make out a case (emphasis supplied) for winding up of the company on just and equitable grounds. The decision nowhere mandates the requirement that the petitioners have to plead that the facts would justify the making of a winding up order of the company on just and equitable grounds. A perusal of the decision in Maharashtra Power Development Corporation Ltd v. Dabhol Power Co. (2003) 5 CLJ 1 cited by Shri V. Ramakrishnan, learned Counsel, reveals that the following four requirements for the maintainability of a petition under Section 397 were raised before the Bombay High Court.
i. the petitioner must prove continuous acts of oppression; a single act, howsoever oppressive, cannot be cause for filing of the petition;
ii. the acts of oppression must continue up to the date of filing of the petition; a fortiori actions subsequent to the petition cannot be taken into consideration;
iii. the oppression must be of minority shareholders by majority shareholders;
iv. the petitioner must prove that facts, exist which would justify winding up of the company on the ground that it would be just and equitable to do so but, in the facts and circumstances, to wind up the company would unfairly prejudice the petitioner.
While, considering the preliminary objection raised at Serial No. (iv) here above, the High Court of Bombay, after analysing the provisions of Section 397 gave in paragraph 3.7 of the judgment the following finding:
"I am, therefore, unable to accept the submission of Mr. Andhyarujina that respondent No. 1 company was a quasi-partnership and the principles of dissolution of a partnership should be applied for considering whether it was 'just and equitable' to wind it up ".
Thus it is clear that there is no finding of the Bombay High Court to effect that there must be pleadings satisfying the requirements of Section 397 (2) (b). The plea of Shri Ramakrishnan, learned Counsel that the recitals forming part of paragraph 33 of the judgment to the effect that "it is necessary for the appellant to allege and prove that facts exist which would justify the winding up of respondent No. 1 on the ground that it is just and equitable to do so but, under the circumstances, it would unfairly prejudice the appellant to pass an order for winding up", are the findings of the Court is misconceived. There is, therefore no merit in the arguments of Shri V. Ramakrishnan, learned Counsel on the maintainability of the company petition and accordingly the preliminary issue is answered in the affirmative. Having found that the company petition is maintainable, the issue that arises for my consideration is whether the petitioners have satisfied the requirements of Section 397, entitling them for any relief under this section. In order to answer the issue in dispute, it is necessary to look at the allegations in the company petition as held in Kalinga Tubes Ltd. v. Shanti Prasad Jain (supra) for the purpose of determining whether the prayers claimed by the petitioners shall be granted or not. The main allegations are -
(a) non convening of the annual general meeting for the past three years;
(b) exclusion of the first petitioner from day-to-day affairs and management of the Company;
(c) illegal removal of the first petitioner as a director of the Company;
(d) illegal appointment of the respondents 3 & 4 as directors of the Company; and
(e) financial mismanagement, misappropriation and misapplication of funds of the Company and diversion of business of the Company for personal benefits and personal concerns of the second respondent.
Before going into the defence of the respondents that at the eleventh annual general meeting of the Company, held on 27.11.2001, which is under serious dispute, the first petitioner was not reappointed, on expiry of his term as director of the Company and further that even in the event of non-cozening of the annual general meeting on 27.11.2001, the first petitioner ceased to hold the office of director on the last date on which the eleventh annual general meeting was to be held, viz., 30.09.2001, it shall be examined whether directorial complaints shall be entertained in the facts and circumstances of the present case. Shri R. Murari, learned Counsel, forcibly argued that such complaints can be entertained in a Section 397 petition in the light of various decisions rendered by this Board, In the case of J.C. Augustine v. Remanika Silks (P), Limited, it is found that the company has taken over the business of a partnership firm with the petitioners as the only partners. The first petitioner is shown to be the Managing Director in the Article of Association of the company and the petitioners collectively hold 35 per cent shares in the company. In B.M. Jain & Sons Co. (P) Ltd. v. Bombay Cable Car Company (P) Ltd., both the rival groups were holding equal number of shares. There was participation in the management by both the groups. The Company was being managed in the nature of partnership. In Ador-Samia Limited v. Indocan Engineering Systems Ltd., the Board after taking into account the circumstances under which the petitioners became shareholders by virtue of the MOA and the shareholders agreement and also the fact that the petitioners had invested substantial amount as intercorporate deposits to tide over the financial difficulties of the company came to the conclusion that the petitioners have a rightful grievance in regard to the attempt of the respondents to somehow or other oust their nominee directors of the petitioners. In the present case, the Company was formed with one N. Ananthakumar and the third respondent as subscribers to the Memorandum and Articles of Association of the Company each subscribing to 100 shares of Rs. 10/- each and they are the first directors of the Company. The parties are strangers and there was no pre-existing partnership business. The Company is not a family company. The petitioners are holding meager 7500 equity shares of Rs. 10/- each, while the respondents group is holding 92.14 per cent of the paid-up share capital of the Company, with unequal shareholding between the petitioners and the respondents. Though the first petitioner was appointed as director in the year 1990 and acting as Chairman of the Company since the incorporation of the Company on account of his alleged expertise in the business, there is nothing in the articles or no agreement or understanding to suggest that the Company must be in the joint management of both the groups. There is no averment in the petition nor during arguments that the Company was to be run as a quasi-partnership. Thus, the facts of the present case are entirely different from those of the cases cited by Shri Murari, learned Counsel and therefore, in the present case the petitioners cannot, in my view, agitate directorial complaint on equitable grounds seeking any remedy under Section 397 on account of the exclusion of the first petitioner from day-to-day affairs and management of the Company. Under these circumstances, it would be futile to go into the validity or otherwise of the minutes of the annual general meeting held on 27.11.2001 and hence the same is not considered by me. In regard to the appointment of the respondents 3 & 4 as directors of the Company, the specific plea of Shri Ramakrishnan, learned Counsel is that the third respondent was a promoter director, as reflected in the Articles of Association of the Company. Though the third respondent had resigned from the office of director, she was subsequently appointed as an additional director, as borne out by the minutes of the meeting of the Board of directors held on 15.10.2000 and Form No. 32 dated 15.11.2000 filed with the Registrar of Companies. The third respondent was again appointed as director at the annual general meeting held on 14.11.2000 for a period of two years until the conclusion of the 12th annual general meeting. In the meanwhile, on the requisition in writing of certain shareholders to convene an extraordinary general meeting, restructuring the Board, the Board of directors at the meeting held on 08.03.2002 had resolved to convene an extraordinary general meeting of the Company on 05.04.2002. Accordingly, the Company had convened the extraordinary general meeting on 05.04.2002, wherein, the respondents 3 & 4 were appointed by majority shareholders as directors of the Company for a period of five years. While the petitioners deny the convening of any extraordinary general meeting said to have been held on 05.04.2002, the validity of the minutes of various meetings is also questioned for not meeting the requirements of Section 193 of the Act. Under Section 193, the entries of minutes of every general meeting or Board meeting or any other meeting shall be made in the book kept for that purposes with its pages consecutively numbered and the same shall be kept for 30 days of the conclusion of the meeting. Furthermore, each page of the minutes book shall be initialled or signed and the last page of the minutes shall be dated and signed by the Chairman of such a meeting. If the requirements of Section 193 are not duly complied with, no presumption under Section 195 can be drawn, as held in Micromeritics Engineers Pvt. Ltd. v. S. Munusamy (supra). The respondents have produced the original minutes books of the Board meetings and general meetings. A perusal of these minutes books shows that none of the pages of the minutes books was initialed or signed and the last page of the minutes was neither dated nor signed by the Chairman of the Board meeting or general meeting. There is no doubt that the requirements of Section 193 have not been complied with and hence the presumption under Section 195 cannot be drawn. There is no record other than the disputed minutes to show that the extraordinary general meeting was held on 05.04.2002. Similarly, there is nothing to show that any Board meeting was conducted on 08.03.2002 for the purpose of convening the extraordinary general meeting on 05.04.2002 save the contentious minutes of the meeting of the Board of directors produced before this Bench. In view of the foregoing, the resolutions appointing the respondents 3 & 4 as directors of the Company are found to be in contravention of the provisions of the Act. At the same time, mere illegal, invalid or irregular acts by themselves, unless they are oppressive to any shareholder or prejudicial to the interests of the Company or to public interest, cannot support a petition under Section 397. It is not the petitioners' case that the appointment of the respondents 3 & 4 as directors is oppressive to any shareholder, including the petitioners or prejudicial to the interests of the Company or to public interest. When the question as to whether an act in contravention of law is per se oppressive came up before the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. - (1981) 51 Comp. Cases 743, it was held that an act which is in contravention of law may be in the interests of the shareholders and the company. Moreover, it is the prerogative of the shareholders, as held in Winfred Investments Limited v. Mainstay Teleservices Private Limited (supra) to choose their own directors and the exercise of democratic power cannot be termed as an act of oppression or mismanagement. Any possible invalidation of the appointment of the respondents 3 & 4 as directors, would not in any way prevent the respondent group holding 92.14% of the paid-up capital from choosing their own directors in the interests of the Company. Before examining the alleged misappropriation of funds of the Company by the second respondent, I shall consider the balance sheet and profit & loss account of the Company for the years ended 31.03.1999 to 31.03.2002, copies of which are forming part of the records before this Bench. The first petitioner is not a signatory to the balance sheet for the years ended 31.03.2000 and 31.03.2002. Though the first petitioner is a party to the balance sheet for the years ended 31.03.1999 and 31.03.2001, his signature in the balance sheet for the year ended 31.03.2001, being purportedly scanned from certain other document is denied by the first petitioner. The respondents in support of their claim that the balance sheet for the year ended 31.03.2001 does contain the signatures of the first petitioner have produced the original balance sheet, the original notice dated 11.08.1999 of the annual general meeting held on 15.09.1999 carrying the signature of the first petitioner, which is undisputed, together with a scanned copy of the said admitted notice dated 11.08.1999 containing the first petitioner's scanned signature. I have carefully scrutinized these documents and the signatures of the first petitioner thereon, with naked eyes as well as through a magnifying lens, made available by learned Counsel for the respondents. I find clearly from the original balance sheet for the year ended 31.03.2001, the impact on reverse of the signed portion, of the impression of the signatures on account of the exertion exercised while putting the signatures. Whereas, no such impression is found and could not also be found on reverse of the scanned signature in the scanned notice dated 11.08.1999. With the aid of the magnifying lens made available by learned Counsel for the respondents while I could see quite a lot of pixels, comprising of white and black dots around the scanned signature portion, contained in the scanned notice dated 11.08.1999, as rightly pointed by Shri Ramakrishnan, learned Counsel, there are no such pixels around the disputed signatures contained in the original balance sheet for the year ended 31.03.2001. I am, therefore, of the opinion that there is prima facie evidence to show that the balance sheet for the year ended 31.03.2001 contains the signatures of the first petitioner and not his scanned signatures. The plea of misappropriation of the foreign inward remittances by the second respondent towards formation of his new companies, viz., VIPL and VATPL lacks details. While the foreign inward remittances are reflected in the bank account statement for the period between 01.06.2001 and 30.06.2001, VATPL is said to have been incorporated in May 1994, the fact of which has not been denied by the petitioners and therefore there is no scope for utilization of the foreign inward remittances for incorporation of VATPL by the second respondent. There is no material to show that the second respondent had availed loans from the financiers for his own purpose. At the same time, the availment of loans by the Company from the financiers and the repayment of the said loans in their favour are accounted in the books of account of the Company and the bank account statement produced before this Bench. Similarly, the money transaction with VATPL is reflected in the balance sheet for the year ended 31.03.2000. The payment made to the third respondent is justified by way of bonus paid by the Company, though the appointment of the third respondent as director is questioned by the petitioners. The amount received by the second respondent from the landlord of the Company and utilization thereof are found to be explained satisfactorily, as borne out by the bank account statement and books of account of the Company. There are a large number of cash withdrawals as borne out by the certificate issued by a chartered accountant produced by the petitioners extracted from the bank account statement for the period between 22.07.2000 and 23.07.2002, out of which the transactions for the period up to 05.02.2001 are relating to the financial year 2000-2001 and the first petitioner is found to be a signatory to the balance sheet for the year ended 31.03.2001. It is not, therefore, open to the first petitioner to challenge these cash withdrawals. The remaining cash withdrawals are in respect of the financial years 2001-2002 and 2002-2003. The first petitioner is not a party to the balance sheet for the year ended 31.03.2002 and could not also be a party for the year ended 31.03.2003, which is not on record. Moreover, these transactions though stoutly denied have not been satisfactorily explained by the respondents, requiring thorough investigation. Though there is a controversy that VIPL is carrying on the very same business pursued by the Company and the petitioners are aggrieved of diversion of the business of the Company to VIPL of which the second respondent is the Managing Director, the petitioners have not furnished any details regarding either the clients or orders of the Company diverted to the concerns of the second respondent. Similar is the grievance in regard to opening of an account with HDFC Bank, which remains only in the pleading. The employment of the staff members of the Company by the second respondent for his business concern is not feasible without consent and free will of such employees and furthermore leaves little impact in the light of the ultimate reliefs proposed to be granted under Section 397. In view of the foregoing conclusions and in exercise of the powers of the CLB under Section 402, the following order is passed: -
Shri S. Venkataraman of M/s V. Sankar Aiyar & Co., Chartered Accountant, Chennai (Telephone No. 28234128/28234162) is appointed to scrutinize all receipts and payments on account of the Company with reference to the books of account, financial statements, bank statement vouchers and other records of the Company, which may be found necessary for the period between 01.04.2001 and 31.03.2003 and also take into account the submissions of the petitioners and respondents to ascertain whether any money of the Company was misappropriated by the second respondent. If so, the second respondent shall reimburse the amount with simple interest at the rate of 10 per cent per annum in favour of the Company within 15 days of the receipt of the report from Shri Venkataraman.
In view of the irreconcilable differences and loss of mutual trust between the petitioners and the respondents, the Company cannot run smoothly with the co-existence of both the parties. The only way to ensure the smooth functioning of the Company is that the warring parties must part ways by the exit of one group from the management of the Company. Towards this end, the petitioners, being minority shareholders will sell their shares in favour of the respondents, at a value to be determined by Shri Venkataraman as on 31.03.2003, in view of the unexplained cash withdrawals made during the financial years 2001-2002 and 2002-03. Both the petitioners and the respondents are at liberty to make their submissions before the valuer, who will take such submissions into consideration while arriving at the value of the shares. The valuation made by the valuer shall be binding on both the sides. 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 the consideration for the shares at value determined by the valuer after deducting the sum of Rs. 40,000/-already paid by them in accordance with the order dated 09.05.2003 of this Bench and the present value of the two wheeler of the Company now in the custody of the petitioners. The Company will negotiate the lees payable to Shri Venkataraman and shall bear the same.
With these directions, the company petition stands disposed of. No order as to cost. Liberty to apply in case of any difficulty in implementation of this order.
Dated this the 30th day of September, 2004