Company Law Board
Shri Jai Pal Saini vs Mex Switch Gears Pvt. Ltd., Shri Jai ... on 3 July, 2006
Equivalent citations: [2006]134COMPCAS428(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioner claiming to be entitled to 33.33% shares in M/S Mex Switchgears Private Limited ( the company ) has filed this petition under Sections 397/398 of the Companies Act, 1956 ( the Act) alleging oppression and mismanagement in the affairs of the company. Consequently, he has also sought for various reliefs more particularly for rectification of the register of members to indicate that his group holds 33.33% shares and for a declaration that allotment of shares made on 29.9.2003 is bad in law and also for a declaration that his removal as a director is unjustified.
2. The facts of the case, in short, are that, the company was incorporated in 1979 by late Mul Raj Saini and his 4 sons-the petitioner, 2nd and 3rd respondents and one Shri Sukhdev Kumar. At the time o incorporation, each subscribed to one share and they all became directors getting equal remuneration. The father who was the chairman of the company expired in March 1997 and Shri Sukhdev Kumar resigned from the Board in 1999. There after only the petitioner and the 2nd and 3rd respondents were managing the affairs of the company. According to the petitioner, since only 3 sons were actively involved in the affairs of the company, each should be entitled to 1/3 of the share capital, but the 2nd respondent, by manipulating the records of the company, now claims that the petitioner is holding only about 13% shares in the company and that with the view to oust the petitioner from the company, he has also been removed as a director.
3. Shri Krishna Kumar appearing for the petitioners submitted: The company is a family company with only family members as directors and holding majority shares. The 2nd respondent, even though the MD of the company, was a Minister of Cabinet Rank in the Government of Punjab during the period 1992 to 1997 and as such he was not taking active part in the affairs of the company but he continued to be in control of all the statutory records of the company. All the directors were being paid fixed and equal remuneration except that the 2nd respondent as MD was getting additional remuneration. Since inception, the petitioner has been acting as a director in charge of works and manufacturing unit of the company. When Shri Sukhdev Kumar resigned as a director, the shares held by him were equally divided among the petitioner and the 2nd and 3rd respondents. The son of the 2nd respondent Shri Jiwan Saini, the 4th respondent, was inducted as a director in place of Shri Sukhdev Kumar. The 2nd respondent who is in control of all records of the company had made various allotments of further shares without the consent of the directors. By these allotments, presently the shareholding of the petitioner has come down from 33.33% to 20.95% and then to 13%. This has been done without the knowledge and consent of the petitioner. In a Board meeting held on 26.8.2003, the Board had purportedly passed a resolution to allot 9000 shares of which 1887 shares were proposed to be allotted to the petitioner. This resolution is a fabricated one as no valid Board meeting was convened nor any resolution passed nor the petitioner being a director informed of the purported meeting. Around 27.8.2003, the 2nd respondent produced the minutes of a purported meeting held in April, 2003 wherein his son Shri Tiwan Saini had been appointed as director- works in place of the petitioner. The petitioner objected to the said resolution and refused to sign the minutes. When the 2nd respondent handed over a circular to be issued to the shareholders stating that the Board of directors had resolved to allot 9000 equity shares in an alleged meeting held on 26.8.2003, the petitioner objected to this circular as no Board meeting had actually been held. Since all the records of the company are with the 2nd respondent, he has been manipulating the records. To ensure that meetings are held with notice to the petitioner, on 28.8.2003, the petitioner addressed a letter requesting the company to send notices by registered post and accordingly sent a demand draft for Rs. 500/-in respect of Board meetings and Rs. 250/- in respect of general meetings. On 30.8.2003, the 2nd respondent sent a letter seeking to make amendments to the allotment of shares proposed in the earlier letter dated 26.8.2003. No Board meeting was held on 30.8.2003 for making changes in the allotment allegedly proposed on 26.8.2003. In the said letter, it was requested that application together with requisite amount should be sent within 15 days i.e. by 14th September, 2003. In the return filed with the registrar of companies regarding the allotment, it is indicated that the allotment was made on 29.9.2003 but return was filed only on 27.10.2003 i.e. a day before the petitioner filed this petition. In the sur rejoinder, it is stated that consideration towards payment for shares had been received on 15.9.2003 but in the accounts book, the payments have been recorded as paid only on 4.10.2003. These discrepancies would clearly indicate that there has been large scale manipulations of records only to reduce the petitioner to less than 33% shares in the company. The petitioner was also unjustly removed as a director, not withstanding the fact that he ahs bee associated with the company from the beginning.
4. Shri Choudhary appearing for the respondents submitted: The foundation of the petition that the company is a family company with equal shareholding is wrong. In so far as the claim of the petitioner that he is entitled for 33.33% shares in the company has no foundation. Originally in 1960, a partnership was formed with the 2nd respondent and his younger brother Sukhdev Saini as partners. In the year 1979, with a view to expand the business, the present company was incorporated with the 2nd respondent, his 3 younger brothers and the father as subscribers to the Memorandum. This company joined as a partner in Mex Switchgears in which the 2nd respondent was entitled to 60% profit, Sukhdev Saini -20% profit and the company-5% profit. In March, 1981, the firm was dissolved and the business of the firm was taken over by the company. Therefore, the 2nd respondent was always entitled to more than 51% interest in the company. From the chart of various allotments made from 1979 annexed at Annexure R-6, it can be seen that at no time the shares were offered on prorate basis. From 1979 to 1999, shares have been allotted 10 times. In 1981, the petitioner held 6% shares which progressively increased to 20.6% and at no time the petitioner held 33.13% shares. In terms of Article 3A which vests with the Board full powers in allotment of shares, the Board had allotted the shares as indicated in the chart. The 2nd and 3rd respondents had to be allotted larger percentage of shares as in the earlier partnership. Therefore, there is absolutely no justification for the petitioner to claim equality in the shareholding.
5. He further submitted: There are only two principal allegations in the petition - allotment of shares and directorship. It is true that the company is a family company and all eligible male members are directors. However, there have been no agreement of equal shareholding. It is the petitioner who is the oppressor by starting a competing business. The petitioner has incorporated a company in the name of Maxel Starters Private Limited in January, 2005 having similar objects as that of the 1st respondent company to carry on competing business. He has also induced a number of employees of the company to resign and join his company. The letters of resignation of 8 employees are annexed at Annexure R-28 to the sur rejoinder. As a matter of fact, even the new factory is located on the land belonging to the petitioner. He has also canvassed the customers of the company as is evident from the two letters written by the petitioner to one of the customers at Annexure R-27. Therefore, the petitioner cannot seek any equitable relief from this court due to his conduct against the interest of the company. In E. Shanmiigam v. APS dun O Metec Pvt. Ltd CP No.34 of 2004, this Board has held that a petitioner who has started his own competing business is not entitled to any relief.
6. The learned Counsel further submitted: The petitioner has filed a suit challenging the board meeting on 29.9.03 which is the main grievance in this petition also. Therefore, the petitioner is guilty of forum shopping. In Indocan case 100 CC 370, this Board has declined to entertain the petition on the same issue on which suit has been instituted prior in time.
7. In so far as the allotment made on 29.9.2003 is concerned, in a Board Meeting held on 26.8.2003, it was decided to increase the paid up capital of the company to Rs. 25 lacs by allotment of further shares. Accordingly, by a notice dated 26.8.2003 (Annexure C), the petitioner was offered 1887 shares asking him to remit Rs. 1,88,700 within fifteen days. Similar letter was sent on 30th August, 2003 (Annexure E). Since there was a typographical error, the same was corrected by a letter addressed to the petitioner on 3.9.2003 (Annexure 1). However, no application was received from the petitioner and accordingly, the shares earmarked for him and not subscribed to by him were equally allotted to the 2nd, 3rd and the 4th respondents. The petitioner obviously did not choose to subscribe as he was planning to start his own business in the land that he had purchased during the year 2002/03. The allotment of shares was made only in terms of the directions of State Bank of India and not with a view to create a new majority or reduce the holding of the petitioner. In so far as his directorship is concerned, the 4th respondent was appointed as a director on 5.5.1999 in a board meeting attended by the petitioner as is evident from his signature in the minutes, a copy of which was produced during the hearing. These minutes were approved in a meeting held on 24.6.1999 on which date also the petitioner was present. The appointment of the 4th respondent as an additional director was necessitated due to the resignation of Shri Sukhdev Kumar Saini. Subsequently, he was appointed as Director (Works) on 17.6.2002. After the 4th respondent took over as Director (Works), he discovered, that, during his tenure as Director(Works), the petitioner had been purchasing raw materials at exorbitant rates and once he was confronted with this information, he stopped attending the works. Therefore, by following the procedure under Section 284 of the Act, he was removed as a director in a general body meeting held on 31.10.2003. Therefore, considering the fact that not only when he was a director in the company he acted against its interest, even after removal he has been carrying on a competitive business, the question of his re-instatement as a director does not arise.
8. The learned Counsel further submitted: Even after filing of the petition, attempts were made to resolve the disputes by which the petitioner agreed to go out of the company on receipt of a substantial consideration. On the basis of the settlement, he resigned from the Board by a letter dated 24.11.2003 (Annexure R-11). His resignation was accepted on 25.11.2003. He also agreed to withdraw the present petition and also the suit filed by him in Jalandhar. Additionally, he also sent a letter to the CLB on 26.11.2003(Annexure R-13) stating that the disputes had been settled and documentation process was on and as such the matter be treated as withdrawn subject to completion of proper documentation. Since the matter has already been resolved, the petition no longer survives.
9. In rejoinder, Shri Krishan Kumar submitted: It is true that the petitioner agreed to go out of the company, but only on receipt of Rs. 1.75 crores. Hoping that the respondents would honour their commitment, the petitioner had handed over a letter addressed to GLB withdrawing the petition and also a letter of resignation. However, without paying even a single pie, the respondents had accepted the resignation and also filed his letter of withdrawal before the CLB. The petitioner had gone abroad in December, 2003 and returned only in Feb. 2004 and the respondents promised that the entire payment would be made before 20th Feb. 2004. All these facts were narrated in a letter addressed to the respondents on 21.3.2004. The alleged agreement which was produced during the hearing without an affidavit indicating therein that the petitioner had agreed to sell the shares for Rs. 13.41 lacs is a fabricated document. The agreement is reportedly made on 10.3.2004 while the stamp paper is dated 21.11.2003. Actually the parties had agree to settled the disputes on 26.11.2003 but no agreement was entered into. In the stamp paper it is indicated that the same was purchased by the petitioner, which he never did. The very fact that the purported agreement was not enclosed either with the reply or with the sur rejoinder filed after the date of this alleged agreement, would indicate that no such agreement was entered into. The respondents cannot expect the petitioner to go out of the company with which he was associated for over 20 years on payment of mere Rs. 13.41. lacs. The claim that the respondents have paid Rs. 50 lacs in cash is nothing but a lie. The petitioner has denied receipt of any money by an affidavit while the respondents have not asserted the payment by way of any affidavit. If the petitioner had received the consideration, the respondents would have sought for instruments of transfer for the shares from the petitioner and would have produced the same before this Bench. Even now, with a view to buy peace, the petitioner is prepared to go out of the company on receipt of fair consideration for his 20.6% shares in the company.
10. The learned Counsel further submitted: The allegation that the petitioner while functioning as director-works, had paid exorbitant price for raw material is baseless as would be seen from the invoices enclosed with the reply at Annexure R-6 that all of them have been signed by the respondents also along with the petitioner. Further, the price of copper changes on a daily basis and therefore to compare the price of a later with that of the earlier date, has no meaning. The respondents have concocted this story only with a view to justify their action in. ousting the petitioner him from the management of company. As far as his own new company is concerned, the petitioner is out of business from 2003 onwards and as he had to survive and accordingly he has incorporated a company, yet, no business has started to allege that there is diversion of business. The letters referred to by the respondents in this regard are all letters addressed to suppliers of raw material and not to the customers of the company.
11. I have considered the pleadings and arguments of the counsel. As rightly pointed out by the counsel for the respondents, there are only two main allegation's in the petition- one regarding the shareholding and the other regarding directorship. As far as the petitioner's claim that he should have 1/3rd shares in the company, the said claim is not supported by any such understanding or could be inferred or deduced from the facts of this case. From the Chart of allotments made right from incorporation of the company, I find that at no time, the petitioner held 1/3rd shares in the company and his allegations that various allotments had been made behind his back, cannot be accepted as he, being a director of the company from the beginning, would have definitely known the increase in the paid up capital from time to time and there is nothing on record to show that he at any point of time enquired as to how such increase in the paid up capital was effected. Further, since shares have been allotted to him also on many occasions, he would have definitely paid consideration for the shares and there is nothing on record to show that he had at any time questioned the mode and manner of allotments. As per the list of allotment show, before the allotment made on 29.9.2003, the petitioner admittedly held only 20.6% shares and not 1/3rd shares in the company. Therefore, the question of declaring him to be 1/3rd shareholder by rectification of the register of members does not arise.
12. In so far as the allotment made on 29.9.2003 is concerned, the main allegation of the petitioner is that he did not receive the notice for the meeting on 26.8.2003 when it was decided to allot shares and also notice for the meeting on 29.9.2003 when the actual allotment was made. The respondents have not established that any notice for these board meetings had been given to the petitioner. In law, board meetings held with out notice to all the directors could be declared to be invalid. But, in the present case, in so far as the meeting held on 26.8.2003 is concerned, the decision taken in that has not caused any prejudice to the petitioner as shares were proposed to be allotted to him in proportion to the shares held by him. Further, it is also on record that the petitioner did receive the letter of offer not once but twice - one on 26th August, 2003 and again on 30th August, 2003. It is also seen from the offers that the share capital was being raised to meet the requirements of State Bank of India. Therefore, when the proposal to increase the share capital was on the basis of requirement of the Bank and on proportionate basis, the said meeting cannot be impugned only because the petitioner did not receive any notice for the same. According to the petitioner, since there were variations in the allotments proposed in the offer letter dated 26th August, 2003 and 30th August, 2003, he wrote to the company on 17.9.2003 not to make any allotment till such time the respondents disclosed the board meetings in which the variation in the figures of the shares offered was decided. I find that in the offer dated 26th August, 2003, the total number of shares proposed to be allotted WHS shown as 9000 with the petitioner's entitlement as 1887 shares. In the second letter dated 30th August, 2003, the total shares offered were 8991, the petitioner's entitlement shown as 1886 shares. Therefore, the petitioner was justified in writing the letter dated 17.9.2003 seeking for clarification. Admittedly, in the absence of any document to the contrary, this letter appears to have not been replied. The board allotted the un-subscribed shares earmarked for the petitioner to other shareholders in its meeting on 29.9.2003, which according to me, cannot be sustained. It is not a case of inaction by the petitioner in accepting the shares but when he had specifically sought for clarification and has sought for keeping the allotment pending till receipt of clarification, the respondents could not have allotted the entitlement of the petitioner to others without due notice to the petitioner. Such allotment of his entitlement to others without notice to him has thus reduced his shareholding from 20.95% to about 13% and as such his grievance of oppression is established.
13. In so far as the allegations relating to the appointment of the 4th respondent as an additional director/director(works) is concerned, I do not find any substance in the allegations as his appointment as additional director was in a board meeting attended by the petitioner. As far as the removal of the petitioner as a director, on the ground that while he was Director (works), he had purchased raw materials at exorbitant prices is concerned, the respondents have relied on certain invoices. The petitioner has rightly pointed out that these invoices bear the initials of the respondents also which fact has not been rebutted by the respondents. The admitted fact in this case is that the company is a family company and the petitioner had been a director right from the beginning. In a number of cases, this Board has held that directorial complaints cannot be entered in a petition under Sections 397/398 of the Act, yet, in family companies, such a claim can be entertained in facts of such cases. Considering the fact that the petitioner has been a director right from the beginning, his removal on unjustified grounds is definitely an act of oppression against him. However, I am not directing his restoration in view of the final order that I propose to pass.
14. It is on record that the parties have entered into an agreement that the petitioner would go out of the company. Whether the agreement has been worked out as claimed by the respondents or it has not been as contended by the petitioner, the fact is that both the groups have realized that they cannot continue together. Under these circumstances, the only way by which the disputes could come to an end is that, the petitioner being in minority, who has already expressed his desire to go out of the company, should go out of the company. The respondents have alleged that the petitioner has started a competing business and therefore is not entitled to any relief. It is on record that even if he has started a competitive business, it was only after he was removed as a director and not before. Even the complaint that he was canvassing the customers of the company is not borne on facts, as the correspondences relied on the respondents in this connection are correspondence with the suppliers of raw materials and not with the customers of the company. Therefore, his starting a competitive business is of no consequence as far as granting of relief when it has been established that he has suffered oppression at the hands of the respondents. I have already held that the petitioner has not established his claim for 1/3rd shares, in the company. Before the impugned allotment of shares on 29.9.2003, the petitioner admittedly held 20.95% share in the company. After the impugned allotment, his shareholding has come down to about 13%. In view of my finding in the earlier paragraph that allotment of the petitioner's entitlement to others when the petitioner had only asked for details and had not expressly declined to except the shares, was an act of oppression, I hold that for the purpose of directing the petitioner to go out of the company, his interest in the company should be deemed to be 20.95%. Since he has been a shareholder and on the Board right from the time of incorporation of the company, he should be entitled to the value of the company computed at 20.95%.
15. Accordingly, I direct the respondents/the company to purchase 20.95% interest of the petitioner in the company on a valuation to be determined by an independent valuer. Both the parties will appear before me on 25.7.2006 at 2.30 PM to suggest a mutually acceptable valuer to determine the fair value of the company. If they are not able to mutually agree on the valuer, this Bench will appoint a valuer.
16. The petition is disposed of in the above terms reserving the right to appoint the valuer and to give consequential directions.