Company Law Board
G. Haranadh vs Shri Laxmi Durga Paper Products (India) ... on 3 December, 2004
Equivalent citations: [2006]129COMPCAS501(CLB), [2005]62SCL279(CLB)
ORDER
K.K. Balu, Member
1. This is a petition under Sections 397 and 398 read with Sections 235 and 237 of the Companies Act, 1956 ('the Act') filed by the petitioner with the consent of seven other shareholders alleging various acts of oppression and mismanagement in the affairs of M/s Shri Laxmi Durga Paper Products (India) Limited ('the Company') and claiming the following reliefs:
(i) to appoint an independent Board of Directors to manage the affairs of the Company;
(ii) to declare that the charge created in favour of the 10th respondent and 11th respondent is illegal, null and void;
(iii) to declare that the respondents 2 to 6 ceased to be directors of the Company;
(iv) to declare that the increase of authorized capital of Rs. 45,00,000/- to 75,00,000/- is ultravires the Memorandum and Articles of Association of the Company and set aside the allotment of shares made on 23.03.1998;
(v) to declare that the conversion of deposits into equity shares by the respondents is illegal, null and void;
(vi) to order an investigation into the affairs of the Company and surcharge the respondents 2 to 7 with siphoning off the Company's funds;
(vii) to direct the respondents to hold annual general meetings of the Company with due notice to the petitioner and other shareholders;
(viii) to direct the respondents 1 to 7 to account for the movable assets removed and sold illegally and make good the loss suffered by the Company; and
(ix) to grant any other relief as this Bench may deem fit in the facts and circumstances of the case.
2. The main acts of oppression and mis-management as alleged in the Company Petition relate to the following:
a) illegal increase of the authorised share capital at the extra-ordinary general meeting allegedly convened on 23-03-1998 from Rs. 45,00,000/- to Rs. 75,00,000/-;
b) illegal allotment of shares by manipulation of records of the Company and fraudulent filing of forms with Registrar of Companies;
c) delay in delivery of the share certificates in favour of the petitioner group;
d) illegal mobilisation of huge deposits from members of the public and unilateral conversion of such deposits into shares;
e) siphoning off the Company's funds by illegal sale of the movable assets and diversion of the stocks and utilisation of the sale proceeds and resources of the Company for the benefit of the respondents and their proprietary concerns;
f) encumbering the assets of the Company by creating charge in favour of the respondents 10 & 11, closely held by the 2nd respondent;
g) non-sending of notices either for the general or annual general meetings and non-sending of balance sheets and annual reports of the Company; and
h) illegal removal of the 12th respondent and the appointment of 13th respondent as the statutory auditor of the Company without approval of the shareholders of the Company.
3. Shri P.H. Arvind Pandian, learned counsel appearing for the respondents raised a preliminary objection as to the maintainability of the company petition on the ground that the petitioner's share holding is less than one-tenth of the total issued and paid up capital of the Company and further that the petitioner does not carry the minimum of one-tenth of the total voting power, thereby not satisfying the requirements of Section 399 (1)(a) and Section 235 (2) of the Act. The petitioner filed along with the company petition a letter of consent signed by seven other members in order to satisfy the requirements of Section 399, which is a blanket one without any particulars of the complaints made and the reliefs sought in the company petition and there is no application of mind on the part of the consenting members rendering it to be an invalid consent as held in Kilpest Pvt. Ltd. v. Shekhar Mehra (1987) 62 Comp. Cases 717; M.C. Duraiswami v. Sakthi Sugars Ltd. (1995) 2 CLJ 553 and S.S. Laxminarayanan v. Mather & Platt (India) Ltd. and Ors. (1997) 4 CLJ 281. The company petition was originally filed in June 2002 which was revised again and again before filing the present company petition on 6.11.2003. The consent letter filed before this Bench in the form of an authorisation does not bear any date. There is no material to show whether the consenting members have given their authorisation to file the present company petition either under Sections 397 and 398 or Section 235 read with Section 237(b). The consent letter only speaks of the alleged manipulation, cheating and breach indulged by the respondents 2 to 4, M/s. Ramanand & Co and others and does not make any reference to the acts of oppression and mismanagement in the affairs of the Company. The defective consent letter cannot be revived by the affidavits filed subsequently by certain members without application of their mind, especially when they are identical and similar in maintaining the same format. The consent in writing is a substantive and not procedural matter which goes to the root of the entitlement to file a petition under Section 397/398, the validity of the same has to be viewed rigidly and the initial defect cannot be cured as held in V. Shanker v. South Indian Concerns Ltd. (1997) Vol.11 SCL 105. The consent is not therefore valid, in which case the company petition under Sections 397 & 398 by the petitioner not satisfying the requirements of Section 399 cannot be maintained. While the proviso to Section 399 empowers any member or members to make an application under Sections 397&398 with the consent in writing of other members, there is no such proviso for making an application under Section 235 of the Act. The consent obtained from other members cannot be relied upon by the petitioner to maintain the petition under Section 235(2) and, therefore the prayer made under this Section can neither be granted by this Bench. Furthermore, the consent letter obtained from seven other members holding 1,11,300 shares includes 12500 shares in the name of Segu Srimannarayana, who has not however signed the consent letter. With the exclusion of Segu Srimannarayana holding 12,500 shares, the consent letter by the remaining members does not meet the requirements of Section 399(1) (a). The petitioner and three of the consenting members viz., P.V. Rao, P. Dhana Lakshmi and P. Shyam Prasad are claiming 53,800 shares to be the amounts of pronotes issued by the Company and enforced in the civil suits filed by them before the civil courts in Andhra Pradesh. These members should either claim their shares or the equivalent amount of pronotes issued by the Company and without withdrawing the pending civil suits, the consent given by them cannot assume any legal sanctity. Thus, the company petition does not satisfy the requirements of Section 399(1)(a), Section 235(2) of the Act.
4. Shri Venkatavaradan, learned counsel while answering the preliminary objection raised by the respondents submitted that the present company-petition has been filed by the petitioner with due consent from seven other members who are collectively holding more than 10% of the paid-up capital of the Company. With the exclusion of 15,000 shares of Segu Srimannarayana for want of his signature in the consent letter, the holding of the petitioner and the remaining consenting members would not be less than 10% of the paid-up capital of Rs. 75,00,000/-, in which case the petitioner and the remaining consenting members still hold the requisite qualification shares under Section 399(1)(a) for maintaining the company petition. The decisions cited on behalf of the respondents according to Shri Venkatavaradan, learned Counsel, are distinguishable from the facts of the present company petition. In M.C. Duraiswami v. Sakthi Sugars Limited (supra), the consenting members clearly stated that they have not given consent for filing of a company petition before the Company Law Board. Against this background, the Madras High Court held that the members should have known what was the action taken, what was the relief prayed for and what was the ground raised in support of the relief claimed and further held that the member who gives consent should have applied his mind to the question before giving his consent. The Division Bench of Madhya Pradesh High Court in Kilpest's case found the consent letter to be invalid on account of the fact that the consent did not fulfil the legal requirements of Section 399(3). In the case of S.S. Laxminarayanan v. Mather & Platt (India) Limited, the Court came to the conclusion that the members who gave their consent were not aware of the averments and reliefs sought in the petition, especially, when similar matter was pending before the Industrial Court on the same facts. Whereas, the earlier company petition filed under Sections 397 & 398 was signed by the petitioner and certain other consenting members but was not prosecuted on account of certain defects contained therein. The present petition came to be filed by the petitioner together with the consenting members after correcting those defects. The consenting letter produced before this Bench specifically speaks about the acts of fraud and cheating by the 2nd respondent and others, which would show that the consenting members applied their mind before giving their consent. Furthermore, the consenting members have filed a signed copy of the company petition along with an affidavit clearing the apprehension raised by the respondents regarding their consent for filing the present company petition. The petitioner and the other consenting members, viz., P.V. Rao, P. Dhana Lakshmi and P. Shyam Prasad have filed civil suits against the Company for recovery of the amounts due and payable to them under the pro-notes executed by the Company. The suit claims do not in any way represent the shares held by them in their name. The respondents have not chosen to produce copies of the civil proceedings to show any connection between the suit claims and the claim of the petitioner and the consenting members in their capacity as members of the Company. The members have every right to file an application under Section 397 or 398. Section 235 provides that members holding one-tenth of the total voting power may make an application to the CLB for declaring that the affairs of the Company ought to be investigated by an inspector or inspectors appointed by the Central Government. In the present case, the petitioner and other members holding more than one-tenth of the total voting power have approached the CLB for appropriate remedial measures under Section 235. There is no legal bar for the members to give consent when a comprehensive petition is filed under Sections 397, 398 and 235, more so when they hold the requisite voting powers. Shri Venkatavaradhan, learned Counsel, therefore, contended that the company petition fully satisfying the requirements of Section 399(1)(a) and Section 235(2) is maintainable and further elaborated the following acts of oppression and mis-management in the affairs of the Company:
* The Company was incorporated by the 2nd respondent and his family members. The petitioner and the other consenting members were approached by the 2nd respondent for investment towards the share capital of the Company. As on 30.03.1996, the petitioner along with the consenting members hold shares worth Rs. 9,38,000/- consisting of 93,800 shares of Rs. 10/- each. The investment made by the petitioner and his family members in December 1995 accounts for an aggregate sum of Rs. 4,75,000/- towards share capital of the Company, but the Company allotted 20,000 shares on 30.03.1996 in favour of the petitioner; issued share certificates only in January, 1999 and the balance shares were allotted in March 1998. The entire allotment of shares made in March 1998 is bad in law for the following reasons:
* The authorised capital was increased from Rs. 45,00,000/- to Rs. 75,00,000/- at the extra-ordinary general meeting purportedly held on 23.03.1998. The respondents have not produced copies of the notice sent to the shareholders or any evidence for despatch of the notice or the minutes or any other material to show that any extra-ordinary general meeting of the Company was held on 23.03.1998. There is no justification for increase of the authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/-.
* Form No. 5 and Form No. 23 were fraudulently filed with the Registrar of Companies, as if an extraordinary general meeting was convened on 23.03.1998 for increasing the authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/-.
* The Company belatedly allotted the shares, in spite of requests of ' the members for refund of the share application money and filed fraudulently form No. 2 with the Registrar of Companies furnishing particulars of the allotment of impugned shares. A number of shares was allotted in fictitious names, as borne out by theory affidavits filed by certain persons, who never paid any consideration for the shares.
* The copies of minutes of the various meetings of the Company produced before this Bench are merely fabricated documents and no reliance can be made on such fabricated documents. It is revealed from copy of the minutes of the annual general meeting held on 30.09.1997 that only 11 members, being relatives of the 2nd respondent attended the said meeting. This copy of minutes is self-serving document and establishes the fact that no notice of the said annual general meeting was sent to the petitioner and other shareholders of the Company. Though the petitioner objected for holding of the annual general meeting without the directors' report and the audited balance sheet, the respondents had manipulated the minutes as if the annual general meeting was held on the relevant date. Mere production of copy of the attendance register cannot show that the annual general meeting was duly convened by the company.
* The Company had collected huge deposits from the public with an option to convert such investments into shares of the Company, issued deposit receipts and deducted TDS. The deposits accepted by the Company are shown under the Head "Unsecured Loans" in the balance sheet for the years 1995-96 and 1996-97. The Company converted the deposits so accepted from the public into shares at the extra-ordinary general meeting allegedly held on 23.03.1998, without obtaining consent.
* The respondents are guilty of siphoning off the Company's funds by creating a second charge over the entire properties of the Company with pari passu rights in favour of the respondents 10 & 11 owned and controlled by the 2nd respondent on 20.10.1999 for Rs. 60,00,000/- & Rs. 10,00,000/- respectively carrying interest @ 18%. The charge in favour of respondents 10 & 11 was created by the 4th respondent, as the Chairman and Managing Director of the Company. But there is no material to show as to how and when the 4th respondent became the Chairman and Managing Director of the Company. Moreover the 4th respondent was an interested director in respect of the transactions involving the 10th respondent, owned and held by the 2nd respondent. The charges created in favour of respondents 10 & 11 are illegal, null and void and not binding upon the Company. After closure of the dues of the first charge holder, viz., the State Bank of India, out of the insurance claim received by the Company in December 2001, the 10th respondent became the first charge holder. This modification of charge was executed by the 2nd respondent on behalf of the 10th respondent and by the 6th respondent on behalf of the 11th respondent. There is no document to show as to how the charges were created in favour of the respondents 10 & 11. There are no details explaining the purpose for which these amounts were spent. The Company stopped its operations since October 1998, in which case there was no need for creation of any charge and availment of any loan from the respondents 10 & 11.
* The petition lists out a number of machinery, several of which are missing. There is no explanation as to how the missing assets of the Company have been dealt with by the respondents. They have sold several movable assets of the Company and used the sale proceeds for their personal benefit. The petitioner and other shareholders are deprived of the value of the missing and sold out machinery, which has been misappropriated by the respondents. The News Liner Web Offset Printing Machine valued at Rs. 14,00,000/- was sold to M/s. Moon Books Private Limited in the month of August 2001 and the sale proceeds were reportedly received in the year 2002, but the sold out machine is shown in the list of assets filed by the Company before this Bench, with the object of taking away the Company's asset during the pendency of the present proceedings.
* The Company had borrowed funds without any authority and used the borrowed funds and the entire resources of the Company for the personal benefits of the respondents. The 2nd respondent diverted the purchased stocks of the Company to carry on his sole proprietary concerns. Though good amounts of stock were shown, the Company did not undertake any production activity thereby the Company's funds were used for the personal benefit of the respondents.
The 12th respondent, the statutory auditor of the Company was illegally removed by the 2nd respondent in collusion with the respondents 3 & 4 and the 13th respondent came to be appointed by forging the signature of the 12th respondent, who since initiated proceedings before the Institute of Chartered Accountants of India against the 13th respondent for his professional mis-conduct, in assuming charge as the statutory auditor without being validly appointed by the members of the Company and for forging his signature.
* The manner in which the statutory auditor was removed, the Company's assets were sold and encumbered in favour of the entities closely held by the 2nd respondent or his relatives calls for investigation into the affairs of the Company. The monies realised by way of encumbering or selling the Company's assets were siphoned off by the respondents who should be called upon to make such losses sustained by the Company for the benefit of all the shareholders, in support of which a reference has been made to K. Narain Das v. Bristal Grill (P) Limited and Ors. - (1997) 3 Comp LJ 321.
Shri Venkatavaradhan, learned Counsel, while concluding his submissions reiterated that the petitioner has made out a clear case of gross oppression and mismanagement on the part of the respondents in the affairs of the Company and they are guilty of those acts which must be remedied as claimed in the company petition.
5. Shri P.H. Arvindh Pandian, learned Counsel, opposed the company petition on the following among other grounds: -
The Company is not owner of many of the machinery listed out in company petition. The Company sold, certain machinery in 2001, prior to filing of the company petition to M/s Moon Books Private Limited for a sum of Rs. 8,25,000/-, by way of proper resolutions passed by the Board of directors of the Company. All the Sale proceeds of the assets were utilised towards repayment of the bank loans availed by the Company as borne out by the extracts of the Company's ledger account and the bank's statement of accounts for the period from 29.03.2000 to 13.11.2003 (Annexure- A5). Furthermore, one of the machinery, viz., News Liner Web Offset Printing Machine was damaged in the floods and lost its value. Nevertheless, the said machine was sold at the market price for a sum of Rs. 4,12,000/-, as per the report dated 02.07.2001 of a chartered engineer (Annexure-A3) and received the sale proceeds before September, 2002, but the said machine was not delivered to the purchaser. In view of this, the machine which was available with the Company as on 04.10.2002 was furnished in the list of assets filed before this Bench. M/s Moon Books Private Limited is not owned by any of the relatives of the 2nd respondent.
The Company had accepted unsecured loans, but not deposits from the public at any point of time, as borne out by copy of the receipt produced by the petitioner (Annexure-AA1). A copy of the unsigned circular letter inviting deposits from friends produced by the petitioner does not establish the claim of the petitioner that the Company invited posits from the public. The Company received share application money and when the share application money received pending allotment exceeded the authorised capital forced the Company to show the same under the head "Unsecured Loans" in the balance sheet of the Company at the relevant point of time. The Company immediately on increase of the authorised capital allotted shares in favour of the various members, resulting in considerable delay.
The Company was convening the general and annual general meetings in accordance with law, after due notice of such meetings and sending the balance sheets and annual reports of the Company to all the shareholders from time to time. The petitioner signed the attendance register of the Company while attending the annual general meeting on 24.09.1998, as borne out by an extract of the attendance register and misbehaved at the meeting, compelling the Managing Director to lodge a complaint with the Police Commissioner, Vijayawada and therefore, the petitioner cannot now claim that the Company did not hold the annual general meetings. There has been no complaint from any shareholder excepting the petitioner in regard to non-sending of the notices, balance sheets and annual reports of the Company. The petitioner has not chosen to ventilate his grievances at any prior point of time, but approached belatedly the CLB with such false allegations. The authorised capital was not sufficient to allot the impugned shares and could be allotted only on 25.03.1998 after the increase of authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/- in favour of the existing members including the petitioner and some of his family members pursuant to due notice to the shareholders along with the explanatory statement sent on 21.02.1998 calling an extraordinary general meeting and passing necessary resolution on 23.03.1998, as borne out by Form No. 5 and Form No. 23 filed with the Registrar of Companies. Mere delay in filing the statutory forms and making the allotment would not amount to an act of mismanagement in the affairs of the Company and vitiate the allotment. The affidavits obtained from some of the persons by the petitioner declaring that they neither applied for any shares nor paid consideration for any shares is belied by copies of the share application submitted by those persons, produced before this Bench (Annexure-A-1). The fact of allotment of shares has been mentioned in the annual report circulated to the shareholders along with the notice calling for .the annual general meeting held on 24.09.1998.
The 12th respondent was the statutory auditor of the Company till 30.09.1997, when the members did not reappoint him at the annual general meeting on account of his prejudicial acts against the interest of the Company and the 13th respondent was duly appointed as the auditor in the place of the 12th respondent, which cannot be questioned by the 12th respondent. Moreover, mere non-appointment of the 12th respondent as the auditor of the Company would not amount to an act of oppression. The complaint of the 12th respondent made after a delay of seven years is an after-thought and motivated by the petitioner and other consenting members. The 12th respondent in his correspondence addressed to the insurance company and others categorically confirmed the convening and holding of the annual general meeting of the Company on 30.09.1997. Most of the documents filed by the 12th respondent in support of his allegations in the affairs of the Company do not either bear the signature of any of the directors of the Company or the signatures are found to be forged and therefore no reliance can be placed upon such documents. The claim of the 12th respondent in relation to his removal as the statutory auditor by means of a forged letter of resignation without convening any annual general meeting for the year 1997-98 as well as the appointment of the 13th respondent in violation of the provisions of the Act as the statutory auditor of the Company is before the disciplinary committee of the Institute of Chartered Accountants of India. While the Company took the initiative for making the insurance claim pursuant to the damages caused to the stocks and machinery on account of the floods, the petitioner and the 12th respondent caused all sorts of hurdles by writing frivolous letters to the insurance company on the ground that the Company inflated the claim, preventing the Company from getting the insurance claim. Nevertheless, the Company could successfully obtain the insurance claim of Rs. 38.81 lakhs and utilised the proceeds towards settlement of the bank dues.
The Company created charge in favour of the respondents 10 & 11 to secure the loans availed from them. As at 31.03.2003, the Company owes a sum of Rs. 40.92 lakhs on account of inter-alia, purchase of books and materials, borrowings from the 10th respondent as well as M/s Chitralaya Laminations assumed by the 10th respondent. The charge created by the Company is enforceable for the outstanding amount due to the charge holder.
There was no diversion of funds or stocks from the Company to the sole proprietary concerns of the 2nd respondent. The transactions between the Company and other concerns were properly made with prior approval of the Board of directors of the Company and the petitioner raised the same allegations of diversion at the time of the insurance claim made by the company, but the insurance company ignoring the charges of the petitioner settled the claim, which shows that the charges levelled by the petitioner are baseless.
6. The 12th respondent, the then statutory auditor of the Company appeared in person and submitted: He came to know about the acts of oppression in the affairs of the Company through P.V. Rao, one of the consenting members and other members. The amounts invested by these members, are neither recorded in the books of account nor reflected in the balance sheet for the year ended 31.03.1997. The Company denied him the right of access to the books of account and records of the Company in discharging his statutory functions. He was removed and the 13th respondent was appointed in his place as the statutory auditor by forging his letter of resignation, without convening the annual general meeting for the year 1997-1998, which resulted in a complaint made by the 12th respondent under Section 21 of the Chartered Accountants Act, 1949 with the Institute of Chartered Accountants of India, which is still pending before the disciplinary committee. The 13th respondent misrepresented himself to be the statutory auditor since the year 1997-1998. The increase in the authorised capital was not approved by the shareholders in any general meeting during the year 1997-1998. The stocks worth Rs. 31,05,000/- were damaged, but not the machinery during occurrence of the floods in October 1998 and however, the Company obtained the insurance claim of Rs. 38,81,711/- on account of the inflated figures furnished by the Company. The Company had adequate stocks, funds, labour and other facilities to execute the orders received from Lepakshi Handicrafts Emporium Company and there was no need to consume stocks either from the 10th respondent or Chitralaya Laminations. However, the 10th respondent had taken delivery of the finished stock i amounting to Rs. 5.25 lakhs from the Company. Palaniappa Agencies & Meenakshi Agencies are genuine suppliers to the Company to the tune of Rs. 6.68 lakhs and Rs. 91,488.88 as on the date of discontinuance of the operations of the Company. At the time of floods, the Company had surplus funds of Rs. 2.94 lakhs. The amounts misappropriated by the respondents by way of sale of movable assets, diversion of stock, creation of charge over the Company's assets would exceed Rs. 1.54 crores after providing cumulative depreciation. The investments allegedly made by the 2nd respondent and his associates to the tune of Rs. 10.40 lakhs includes the moneys advanced to the Company in cash which are not accounted in the books of account. These amounts must be recovered from the 2nd respondent and his associates in the interest of the Company.
7. I have considered the pleadings and arguments both oral and written of learned counsel. Before going into the rival contentions, I shall consider the preliminary objection as to whether the company petition meets the requirements of Sections 399(1)(a) and 235 (2).
By virtue of Section 399, where any members of a company shall have the right to apply under Section 397 or 398, any one or more of them having obtained the consent in writing of the remaining members, may make the application on behalf and for the benefit of all of them. The petitioner filed the company petition with consent obtained in writing from seven other members, who are according to the respondents, holding 1,11,300 shares of the Company. Segu Srimannarayana, one of the consenting members has not signed the consent letter, but instead his wife signed on his behalf without any authority from him, in which case his consent remains without any legal sanctity. The petitioner claims 15,000 shares in the name of the Segu Srimannarayana, in contrast to 12,500 shares, as contended by the Company. The holding of the petitioner and the consenting shareholders, leaving the shares in the name of Segu Srimannarayana irrespective of the difference in numbers, would exceed 10% of the issued capital of Rs. 75,00,000/- which leaves no doubt that the petitioner and the remaining consenting members do hold the requisite qualification as specified in Section 399. It shall now be seen whether the consent obtained by the petitioner is a valid consent or not. Consent in writing as contemplated by Sub-section (3) of Section 399 and borne out by various decisions (supra), is a substantive matter to the filing of a particular petition with particulars of complaints and for particular reliefs under Section 397 or Section 398 or under both. Members giving consent should have applied their mind to the issues involved in the petition before them and should have known what reliefs have been claimed in the petition. A mere blanket consent to an application without any particulars of the complaints under Section 397 and or Section 398 being filed is neither enough nor curable later. In the present case, it is on record that the petitioner and P.V. Rao, one of the consenting members had filed as early as on 12-06-2002 an application under Sections 235, 237, 397 and 398 alleging acts of oppression and mismanagement in the affairs of the Company and arraying the other consenting members, as the petitioners, who however had not signed the said application. The petitioner had again with the consent of P.V. Rao and six other members had filed on 23-09-2002, yet another application under Section 235, 237, 397 and 398 in the affairs of the Company. These applications were not prosecuted by the petitioner and other consenting members. The present company petition came to be filed on 06.11.2003 by the petitioner making use of the very same consenting letter filed along with the application already made on 23-09-2002. The consenting letter which is not dated reads as under:
"WE, the share holders of Laxmi Durga Paper Products (1) Ltd., Jupudi Donka, Ibrahimpatnam, Vijayawada, as petitioners do hereby authorize Sri G. Haranadh to represent us individually by himself or appoint any person authorized by him on our behalf before the Company Law Board Additional Principal Bench in the matter of the . manipulation, cheating, and breach by "Sri Ch. Nandakeswara Rao. Ch. Sujatha, K. Satyanarayana, M/s Ramanand & Co. and others -the respondents in the application.
We further authorize Shri G. Haranadh S/o Late Shri G. Kotaiah to produce the evidence, available documents with us before the Honorable Bench, as and when required."
It is clear that the consenting members categorically authorized the petitioner to represent them and produce evidence before the Additional Principal Bench, Company Law Board on account of the manipulation, cheating and breach committed by the respondents 2 to 4 and others in the affairs of the Company. It is explicitly conveyed that the petitioner would approach the CLB for remedying their grievances on account of the various misdeeds of the respondents in the affairs of the Company, and such a consent in my considered view, cannot be construed as mere blanket consent without any details of complaints. The consenting members are conscious of their grievances and the forum through which such grievances are remediable, leaving little doubt about their application of mind, while executing the consent letter in favour of the petitioner. In view of the serious objections raised by the respondents. ' the consenting members have subsequently filed on 12.07.2004 a signed copy of the company petition, supported by an affidavit separately sworn by each one of them, the relevant portion of which runs as under:
"I state that I have fully understood the averments and contentions made in the Ptition and the reliefs claimed therein. These matters were already discussed amongst us and I am well aware of each and every one of the same. This affidavit is being filed by me only to reaffirm and reiterate my consent for filing the above Petition by Mr. G. Haranadh. In token of the said consent, a copy of tire Petition has also been duly signed by me, being one of the consenting shareholders."
In the backdrop of the sequence of events, I do not hesitate to hold that the consent obtained in writing from other members in fulfillment of the yardstick prescribed in a number of decisions cited supra is a valid one and satisfies the requirements of Section 399(1). It is on record that three of consenting members viz., P.V. Rao, P. Dhana Lakshmi and P. Shyam Prasad are holding 53,800 shares valued at Rs. 5,38,000/- and the share certificates with distinctive and registered folio numbers are duly issued in their favour by the Company. The plea of the respondents that these consenting members are not entitled for any shares, in view of the civil suits filed against the Company by them for recovery of an aggregate sum of Rs. 13.90 lakhs, on the basis of pronotes, said to be representing the share application money is not convincing, in view of the vast difference in value of the shares of Rs. 5,38,000/- and the suit claims amounting to Rs. 13.90 lakhs, absence of any particulars regarding the civil suits and the fact that the share certificates would prima facie establish title of the consenting members for those shares and, therefore, their consent accounting for 53,800 shares cannot be assailed by the respondents. Section 235 empowers not less than two hundred members or members holding not less than one-tenth of the total voting power, in the case of a company having a share capital, to make an application before the CLB for declaration that the affairs of a company ought to be investigated by an inspector or inspectors appointed by the Central Government. There is no provision under Section 235 enabling any member or members to make an application under this section, as expressly envisaged in Sub-section (3) of Section 399 of the Act, according to which, where any members of a company are entitled to make an application in virtue of Sub-section (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them. Therefore, the petitioner holding less than one-tenth of the total voting power with the consent obtained in writing from several other members, cannot maintain e company petition under Section 235, seeking investigation into the affairs of the Company. The preliminary issue on the maintainability of the company petition under Sections 397, 398 and 235 is accordingly answered. Having found that the requirements of Section 399(1)(a) are duly complied with by the petitioner, I shall proceed to consider the purported acts of oppression and mismanagement in the affairs of the Company as under:
Illegal increase of the authorised capital; allotment of the impugned shares and delay in delivery of share certificates to the petitioner group:
The plea of the petitioner is that the increase of authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/- at the extraordinary meeting purportedly held on 23.03.1998 without any proof of dispatch of the notice of such meeting upon the petitioner group is bad in law and that the consequent allotment of shares, in favour of the shareholders including the petitioner group, is liable to be set aside. A careful perusal of the documents on record does not disclose any service of the notice of the extraordinary general meeting upon the petitioner group allegedly held on 23.03.1998, approving the increase of the authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/-. However, it is observed from copy of the minutes of the extraordinary .general meeting held on 23.03.1998 that the increase of the authorised capital from Rs. 45,00,000/- to Rs. 75,00,000/- was approved and that the 2nd respondent was 'authorised to allot the amounts credited as "Share Application amount pending allotment" into fully paid equity shares and issue share certificates'. The members present at the extraordinary general meeting on 23.03.1998 is reflected in the attendance register maintained by the Company, as borne out by copy of the extract from the attendance register. The company had filed with the Registrar of Companies, Form No. 5 notifying the increase of authorised capital and Form No. 23 along with the certified true copy of the resolution approving the increase of capital for registration by the Registrar. Form No. 5 and From No. 23 though belatedly filed, would not vitiate the enhancement of capital but only attracts penalty against the Company and every officer in default. Form No. 23 indicates that notice was dispatched by the Company on 21.02.1998 to the shareholders and that the meeting approving the increase of capital was held on 23.03.1998. At this juncture, it is relevant to observe that the 12th respondent in his communication dated 11.03.1999 addressed to the Insurance Company categorically indicated that the annual general meeting of the Company was held on 30.09.1997. As at .1997 the authorised capital stood at Rs. 45,00,000/- and the paid up capital at Rs. 41,00,000/-. Furthermore, a sum of Rs. 38,05,332/- is reflected in the balance sheet for the year ended 31.03.1997 under the head of unsecured loans by way of share application money received pending allotment from 172 shareholders. Copies of the application applying for equity shares made in the year 1996 by the wife and children of P.V. Rao, one of the consenting members on record remain undisputed. It is clear that without the increase of authorised capital from Rs. 45,00,000/-, no further shares could be allotted from and out of the share application money of Rs. 38,05,332/-, in favour of the shareholders and therefore, the increase of authorised capital to Rs. 75,00,000/-, in my view, must be in the interests of the Company and its shareholders, though might be irregular. At this juncture, the principles enunciated by the apex court in the case of Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited, assumes relevance according to which every action in contravention of law may not per se be oppressive for the purpose of Section 397 of the Act; a resolution passed by the directors may be perfectly legal and yet oppressive and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company. In a number of decisions, this Board held that mere increase of authorised capital would not constitute an act of oppression, unless the allotment of the increased capital is perverse. I am, therefore, of the view that the increase of authorised capital, cannot be construed to be oppressive for the purpose of Section 397. It is observed from the return of allotment viz., From No. 2 filed belatedly by the Company with the Registrar of Companies that 3,40,000 shares were allotted on 23.03.1998 in favour of among others the petitioner group. The applicant had asked for refund of the share application money from the Company in his communication of March 1999 in the following words:
I had requested vide my above referred letter to refund the amount placed with company with interest. But you had sent a letter in 19___along with share certificates in view of the money placed in the company mentioning that the shares were alloted in March '98".
The grievance of the petitioner, as borne out by his communication is that the allotment of shares made in March 1998 beyond the paid up of Rs. 41,00,000/- in the absence of any valid increase in the capital is valid. However, the increase of capital is found to be not oppressive of the shareholders. The allotment of 3,40,000 shares were made in March 1998, when the Company was in operation, from and out of the share application money received from the various shareholders and therefore there is no justification to set aside the impugned allotment. The compliant of the petitioner that there was inordinate delay in delivery of the share certificates in favour of the petitioner group must be seen in the light of the inadequate authorised capital to absorb any fresh allotment, leading to the delay as contended by the petitioner, in delivery of the share certificates, for which the Statutory Authority is at liberty to take such action as may be deemed fit in the circumstances of the case. The Company, petition is silent on the prejudices, if any, suffered by the petitioner on account of the delay in delivery of the share certificates by the Company. Furthermore, this complaint of the petitioner remedied prior to filing of the company petition, cannot now be the subject matter before the CLB.
Siphoning off the Company's funds by illegal sale of the movable assets, diversion of the stocks and encumbering the assets of the Company.
The petitioner has furnished in the company petition' a list of machinery said to be belonging to the Company, which is not authenticated by him. There is no material to show whether the machinery described in the list belong to the Company especially when the Company disputes ownership of certain items of the machinery. The petitioner neither chose to furnish the present value of the machinery. It is on record that the Board of directors at the Board meeting held on 11.08.2001 resolved to sell the printing, binding and all machinery, spare tolls and other equipments situated at the factory premises for a sum of Rs. 8,25,000/- to D. Ramu, a promoter of M/s "Moon Books Private Limited" after obtaining a valuation report dated 02.07.2001 from L. Shiva Shankar, a Chartered Engineer, the relevant portion of which reads as under:-
"Rust is found here and there on all the machines. All most all the moving parts are worn out. On enquiry I came to know that the machinery were once submerged in flood waters in the year 1998 and were not in use there after.
Taking into consideration of the above parameters, I am of the opinion that the over all cost of the machinery would be around Rs. 8,02,000.00(MAX.)"
The sale proceeds of Rs. 8,25,000/- realized by the Company are found to be utilized towards repayment of the bank loans. It is further observed that the News Liner Web Offset Printing Machine valued at 4,00,000/- by the valuer has been sold at Rs. 4,12,008/-. Though the petitioner is disputing the value of the said machinery, yet he failed to substantiate the market value of the machinery at the. time of sale. The fact of damage caused to the machinery on account of the floods remains undisputed by the petitioner. The plea of the petitioner that M/s Moon Books Private Limited is controlled by the relatives of the 2nd respondent is not supported by any material. The sequence of , events show that the machinery at the factory premises of the ' Company damaged in floods are found to be sold with necessary approval of the board of directors on ascertaining the value thereof for the benefit of the Company and its shareholders. The sale of machinery in my view cannot be doubted merely because certain machinery was left in the custody of the Company even after effecting the sale, more so, when the entire sale consideration is found to be utilized for repayment of the bank loan taken by the Company. The allegation of diversion of the funds, stocks and resources, of the Company by the 2nd respondent to his other establishments and for the personal benefits of the respondents lacks Retails and remains, without having been substantiated by the petitioner. In the light of the serious charges of siphoning off the Company's funds by creating charge over the assets of the Company to secure the loans purportedly extended by the respondents 10 and 11, this Bench by an order dated 13.07.2004, with a view to sort out the contentious issues between the parties directed as under:
"1. M/s Brahmayya & Co., Chartered Accountants, Vijayawada are appointed to verify and give his report on the following transactions of the Company:-
a) To furnish a list of liabilities of the Company as on 30.06.2002;
b) The printing machinery sold by the Company to M/s Moon Books Pvt. Ltd.;
c) The charges created on the assets of the Company for the facilities said to have been advanced by M/s Shri Laxmi Durga Binding Works and others belonging to the respondents group.
2. The report shall comprise the requisite details in respect of the above transactions, more particularly, the receipt of funds and utilization thereof by the Company. Both the parties are at liberty to produce the documents in their custody and make their submissions in support of their claim, in respect of the above transactions to enable the auditors to finalise their report. The report so finalized and submitted by the auditors will be binding on both the parties in so far as these transactions are concerned (emphasis supplied). This Bench will pass appropriate directions on submission of the report by the auditors.
3. Accordingly, this order is passed in the presence of and with the consent of respective parties and their Counsel."
The Chartered Accountants on verification of the documents produced by the parties and on hearing their oral submissions in relation to the transactions of the-Company, in terms' of the order of this Bench submitted a report on 20.08.2004, revealing the following salient features:
As at 30.06.2002, the total liabilities of the Company account for Rs. 92,87,529/- which comprise of secured loans of Rs. 38,84,253/- in favour of the 10th respondent, unsecured loans aggregating Rs. 24,84,449/- in favour of as many as 23 creditors and an aggregate sum of Rs. 29,18,827/- payable to 7 sundry creditors. The Chartered Accountant's report exhaustively deals with the steps taken by the Company for sale of its machinery and further confirms that the sale proceeds of machinery have been utilized to settle the bank dues. The report gives a detailed account of the charges created on the assets of the Company in favour of the respondents 10 & 11. At the Board meeting held on 15.09.1999 the Board of Directors approved the second charge on the assets of the Company in favour of the respondents 10 & 11. As at 15.09.1999 when the Company created second charge, it owed Rs. 880576/- to 10th respondent and a sum of Rs. 500500/- in favour of 11th respondent on account of the financial transactions, the Company had with the respective respondents. Forms No. 8 & 13 dated 05.11.1999 filed with the Registrar of Companies, Andhra Pradesh, Hyderabad was registered on 24.02.2000. The Company cleared the secured loan taken from the State Bank of India and filed Forms No. 13 & 17 modifying the charge after approval of the Board of directors at the meeting held on 20.12.2001. The Company entered into an agreement with the respondents 10 & 11 on 20.12.2001 creating mortgage by deposit of title deeds with exclusive charge on assets of the Company and filed Forms No. 8 & 13 with the Registrar of Companies. The loan obtained from 11th respondent was repaid in full on 25.06.2002; and filed Forms No. 17 & 13 with the Registrar of Companies. These findings of the Chartered Accountants prima facie establish the charges created by the Company in favour of the respondents 10 & 11 and are binding on the both the parties. Under law, consideration may be past, present or future. As on the date of creation of charge, the Company reportedly owed a sum Rs. 8,80,576/- to the 10th respondent and as at 30.06.2002, the outstanding amount is reported to be of Rs. 38,84,253/-. Though the charge was created for Rs. 60,00,000/- in favour of the 10th respondent, yet it can be enforced only for the amount which is lawfully outstanding in the books of account of the Company. The report discloses quite a number of statutory' violations and irregularities which are procedural in nature and are not however germane to the disputes before this Bench. At the same time, it is for the Competent Authority to take any appropriate action for such violations, as may be deemed fit.
Non-sending of notices for the general or annual general meetings of the Company and non-sending of balance sheets and annual reports of the Company:
The grievances of non-sending of notices for the meetings of members of the Company and non-sending of balance sheets and annual reports are found to be raised for the first time in the company petition. There are a number of communications addressed by the petitioner and P.V. Rao in favour to the Company on record for refund of the share application money, interest amount, share certificates, statement of accounts, copies of minutes of the annual general meeting, register of shareholders, challenged the increase of capital as well as allotment of shares and requisitioned the annual and extraordinary general meeting of the Company. The petitioner has not substantiated his grievances on account of non receipt of notices for the general and annual general meeting of the Company or non sending of balance sheets and annual reports at any prior point of time. On the other hand copies of the notice dated 01.09.1998 for the annual general meeting held on 09.1998 and the special notice for the appointment of 13th respondent as the statutory auditor are produced by the 12th respondent. It is further observed that the petitioner had attended the annual general meeting held on 24.09.1998 pursuant to notice dated 27.08.1998, wherein however, it is found that he questioned validity of said meeting on several accounts. The grievances which are not acceptable in entirety are being appropriately remedied.
Illegal mobilisation of huge deposits from members of the public and unilaterally converting such deposits into shares:
The balance sheet of the Company for the years ended 31.03.1996 & 31.03.1997 discloses the unsecured loans taken from the public which are reflected under the head 'Share application money pending allotment of shares'. The notes forming part of the accounts (Schedule XII) for the year ended with 31.03.1998 speaks of share application money of Rs. 7,67,432.55 lying with the Company during the period ended with 31.03.1998. It is on record that the Company had prescribed application forms to apply for equity shares in the Company. P.V. Durga Padmavathi, P. Hari Narayana, P. Rangadham and P. Dhana Lakshmi, all family members of P.V. Rao, one of the consenting members had applied for 16,000 equity shares during the year 1995 and 1996, remitting an aggregate* sum of Rs. 1,60,000, as borne out by copies of the share application form (Annexure-Al series), bearing serial Nos. 33867, 33868, 33869, 33870, 34126, 35487, the fact of which remains undisputed. The affidavits sworn by these persons to the effect that they have not invested any money in the Company for the allotment of shares and that the Company allotted shares without their knowledge or consent are not in consonance with the records produced before this Bench and no value can be attached to any of the affidavits filed in support of the petitioner. Copies of the receipt dated 16.06.1997 of the Company and certificate of deduction of the tax at source in form No. 16A, produced by the petitioner are not in relation to any deposit accepted by the Company. Though the respondents denied that the Company accepted deposits from the public, yet it is observed from the legal notice dated 02.09.1998 sent by way of reply on behalf of the Company that the Company had, in fact, accepted deposits. At the same time no reliance can be placed on the circular letter dated 24.08.1996 said to have been sent by the Company, inviting deposits from friends, when such notice is found to be unsigned. Nevertheless, in the event of acceptance of deposits by the Company in violation of the Companies (Acceptance Deposit) Rules 1975, the statutory authority is liberty to take any suitable action against the Company and its officers in default. There is no material substantiating the plea that the Company had converted huge deposits into shares without consent of the depositors. The petitioner neither pleaded nor established the prejudices suffered, if any, by him on account of the purported conversion of such deposits into shares.
Illegal removal of 12th respondent and the appointment of 13th respondent as the statutory auditor of the Company without approval of the shareholders of the Company:
The removal of the 12th respondent and the appointment of 13th respondent as the statutory auditor of the Company by forging the, signature of the 12th respondent is already the subject matter of the disciplinary proceedings before Institute of Chartered Accountants of India and therefore I do not propose to go into this disputed issue. The shareholders' inherent rights to appoint their auditor cannot constitute an act of mismanagement. Furthermore, most of the allegations made by 12th respondent are hear say and they remain unsubstantiated. The documents produced by the 12th respondent do not either establish any of his wild charges leveled against the respondents.
In view of my foregoing conclusions, I am of the view that the petitioner has not made out any acts of oppression and mismanagement in the affairs of the Company, warranting the reliefs as claimed by the petitioner excepting that the Company shall in future ensure to send periodically notice of the meetings of members, balance sheet and annual report of the Company to the petitioner group by registered post, however, at their cost. Ordered accordingly. Moreover, the Company is closed as early as in the year 1998 and therefore, the petitioner is at liberty to take steps to wind up the Company, if so advised. With these directions the company petition stands disposed of.