Company Law Board
Shri Sarabjeet Singh Mokha vs Marble City Hospital And Research ... on 19 July, 2007
Equivalent citations: [2008]142COMPCAS757(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioner claiming to hold 25% equity shares in M/S Marble City Hospital & Research Center Private Limited (the company) has filed this petition alleging that the respondents have acted in a manner oppressive, to the petitioner by declaring that he had ceased to be a director in terms of Section 283(1)(g) of the Companies Act, 1956 (the Act), and by issue f furthers, the respondents have reduced the petitioner's shareholding from 25% to 10%.
2. The facts of the case are that the company is a private limited company incorporated by the petitioner and respondents 2 to 4 by being subscribers to the Memorandum in the year 1997. All the four were directors of the company. The company is running a hospital in a premise leased out by the petitioner to the company. By a notice dated 18.11.2005, the respondents informed the petitioner that he had ceased to be a director w.e.f. 31.1.2005 in terms of Section 283(1)(g) of the Companies Act and advised him not to interfere with the working of the hospital. Alleging that his removal as a director is an act of oppression and seeking for a declaration that the removal is null and void, the petitioner filed the petition. In the reply to the petition, the respondents had disclosed that further 1,50,000 equity shares had been issued due to which presently the petitioner held only 10% shares in the company. In the rejoinder, the petitioner has challenged the further allotment of shares on the ground of being oppressive to him.
3. Shri Mookherjee, Sr. Advocate appearing for the petitioner submitted: Right from 1997, the 1st petitioner and respondents 2 to 4 have been holding equal percentage of shares and had also lent equal amount of loans to the company and that being directors, all of them were getting equal remuneration. The company is in the nature of a quasi partnership with equal shareholding, equal participation in the management and also with equal remuneration. The petitioner's group has given a their premises to the company on a lease for a consideration of Rs. 1.6 lacs per month. All the three respondents are doctors by profession and have given their equipments to the hospital on charge basis and so far they have recovered more than 90% of the cost of the equipment as charges. The petitioner arranged for loans by giving his personal guarantee for running the hospital. The entire building, fixtures and fittings, all belong to the petitioner. The petitioner was in charge of all legal approvals as well as administration of the hospital. With a malafide intention, the respondents have stopped remuneration for the petitioner from September, 2004 and by a letter dated 18.11.2005 they also informed the petitioner that he had ceased to be a director effective from 31.1.2005. The mode and manner as to how the petitioner ceased to be a director was not indicated in that letter. In that letter the respondents also cautioned the petitioner not to seek any information from the hospital staff notwithstanding the fact that the petitioner is one of the original promoters of the company. Such a denial of right to seek information in his capacity as a director and also a promoter is highly oppressive. When the petitioner, by a letter dated 20.11.2005 (Annexure-E), pointed out that without following the relevant provisions of the Act, he could not have been removed, by a letter dated 28.11.2005 (Annexure-F), the petitioner was informed that in spite of notices having been sent by post and the information passed on to his residence and office, the petitioner did not attend continuously five board meetings and therefore he had ceased to be a director in terms of Section 283(1)(g) of the Act. It was the first time that the reason for his cessation has been intimated. By a letter dated 1.12.2005, the petitioner sought for the details of the board meetings which he had not allegedly attended (Annexure-G). Only thereafter, they informed the dates of the meetings. There was a delay of over 6 months in filing Form No. 32 as it was filed only on 4.7.2005 i.e. after the petitioner had surrendered before the court and taken into custody on 1.7.2005. That itself would indicate that the alleged board meetings are all bogus and fabricated. Further, the respondents have asserted that notices for the impugned meetings were sent by UPC and were also sent in person to the house/office of the petitioner through an employee of the hospital. In paragraph 24 of the reply, the respondents have asserted that by a letter dated 4.2.2005, they have informed the petitioner that he had vacated the office in terms of Section 283(1)(g) of the Act effective from 31.1.2005. However, the fact of his sending the letter was not mentioned in any of the letters dated 18.11.2005 or 28th November, 2005. This letter has been referred to only in the reply, thus, clearly indicating that the letter dated 4.2.2005 is nothing but a fabricated one. The copies of the certificates of posting annexed at R-10 would indicate that no other director had been sent the notice through UPC. If according to the respondents, the petitioner was absconding, they should have sent the notices by registered post so that they would have some reliable evidence of sending the notice. All the UPCs are obviously procured ones. The petitioner has filed a set of documents on 12.10.2006 wherein affidavits given by various persons have been enclosed to indicate that petitioner was present in person to execute the sealed documents in relation to his other business on 2.12.2004, 28.9.2004, 18.10.2004. Therefore the contention of the respondents that the petitioner was absconding from 235.2004 and therefore was not available in civil society and as such notices were sent by UPCs is false. The falsehood of the respondents is evident from the copy of the notice for the board meeting dated 23.1.2005 (Page 161 of Reply) calling for a board meeting on 31st January, 2005 wherein one of the items of the agenda was to file Form No. 32 in respect of the cessation of office by the petitioner. According to their own stand, the petitioner ceased to be a director only effective from 31.1.2005 and therefore the question of consideration of filing of Form No. 32 in the agenda on 23.1.2005 would never arise. This itself would show that all the documents have been cooked up. If the respondents were aware that the petitioner was running around, there was no need to have sent the notices to the residential address of the petitioner. They could have published a notice in the newspaper. The respondents are relying on an affidavit given by one Shri Rajesh Tadas to substantiate their stand that through him notices were personally sent to the residence of the petitioner and the notices were not accepted by the family members. There is no mention in that affidavit about the house address of the petitioner and therefore no reliance could be placed on this affidavit. As a matter of the fact the petitioner has annexed with the additional documents, an affidavit of another employee Shri Satyendra Thakur who has affirmed that the 4th respondent asked him to sign a false affidavit that he had visited the house of the petitioner to serve notices in person, and when he refused to sign the false affidavit, Shri Rajesh Tadas was made to affirm the said affidavit. Thus, from the sequence of events it is apparently clear that documents have been fabricated to ensure that the petitioner ceased to be a director of the company.
4. In so far as issue of further shares is concerned, Shri Mookherjee submitted: The petitioner was never aware of further issue of shares till the respondents filed their reply to the petition wherein they disclosed the further issue. By further issue of shares, the respondents have disturbed the equality in the shareholding. As against a 25% shareholder, the petitioner has been reduced to a 10% shareholder. According to the respondents, offer was made to the petitioner, again by UPC on 30.4.2005 as per the copy of the certificate of posting (Annexure R-19). The address noted in the UPC is different from the address noted in the offer letter. There is absolutely no justification to increase the share capital as the company has been making profits right from the first year. Even the cash credit limit of the company has not been fully utilised. No capital expenditure has taken place nor there was any demand from the bank for enhancement of capital. There is nothing on record to show as to in which board meeting, it was decided to issue further shares as notice for the said board meeting is not disclosed. The very fact that from November, 2006, the company has restored the remuneration to the directors would indicate that the company was doing well. Thus, it is quite obvious that the only purpose of issuing further shares was to reduce the petitioner from an equal partner to a minority.
5. The learned Counsel further submitted: The very claim of the respondents that the petitioner was absconding is wrong and unsustainable. In terms of Section 82 of Cr.P.C., the court has to proclaim and has to issue a public notice that a person is absconding. Admittedly, no such proclamation or public notice was issued. The petitioner was directed to appear through an arrest warrant before the Session court only on 28.1.2005 and the petitioner surrendered on 1.7.2005. As a matter of fact, by a judgment dated 7.7.2006, the petitioner had been acquitted of all charges. Therefore, on the basis that the petitioner was absconding, the respondents could not have acted in a manner oppressive to the petitioner by declaring him to have ceased to be a director and also by reducing his shareholding especially when the company is in the nature of a quasi partnership.
6. Learned Counsel further submitted: In Ruby General Hospital case 2006 7 SCC 613, the Supreme Court has held that removal of a promoter director is an act of oppression. In that case also, the promoter director was declared to have ceased to be a director in terms of Section 283(1)(g) of the Act. Since the respondents have acted in a manner oppressive to the petitioner and since the petitioner is one of the promoters of the company and has also in the active management as asserted by the respondents, even though he holds only 25% shares, the management and control of the company should be given to the petitioner. Further, it is the premises of the petitioner in which the hospital is functioning and therefore he should have the right to control and manage the company. In a similar case in Deepak Lohia v. Kamrup Developers Pvt. Ltd. CP No. 82 of 2000, this Board has held likewise. Recently in Dale & Carrington Investment Pvt. Ltd. v. P.K. Pratapan , the Supreme Court has held that a party committing the acts of oppression should not be allowed to take advantage of their own wrongs. Since in the present case, the respondents are guilty of acts of oppression against the petitioner, they should be directed to sell their shares to the petitioner on a fair valuation. The petitioner is prepared to discharge all the liabilities of the company and the respondents being professional doctors can continue to carry on their practice in the hospital.
7. Shri Choudhary, Senior Advocate, appearing for the respondents submitted: The admitted fact in this case is that the petitioner was not available to the society and was absconding right from 23.5.2005. When the respondents knew that the petitioner was absconding, the question of sending the notices by registered post did not arise. Not only the notices were sent by UPC, they were also attempted to be delivered in person by a messenger but the family members of the petitioner refused to accept the same. The petitioner was absconding on a complaint by a third party filing an FIR alleging robbery and dacoit against the petitioner. For thirteen long months long period from 23.5.2004 to 30.6.2005, the petitioner was hiding and his whereabouts were not known. Only on 1.7.2005, he surrendered and was sent to Jail and he came out on bail only on 16.11.2005. Thus, during this period, the petitioner was not available in the civil society. Even before his surrender, bail applications were filed, not by him, but by his relatives and friends and none of the application was signed by the petitioner. This would indicate that the petitioner was absconding and was afraid to come in the open. His bail applications were rejected. Even though the arrest warrant was issued on 12.1.2005, he waited till 1.7.2005 to surrender. His surrender on 1.7.2005 was widely published in local newspapers. When the petitioner filed a Page Miss 1129-1130
12. I have considered the pleadings and arguments of the counsel. In the petition, the only allegation of the petitioner was about declaration of the company that he had ceased to be a director. Thereafter, after coming to know of further issue of shares as revealed in the reply filed by the respondents, he has challenged the further issue of shares also. The respondents have taken a stand that directorial complaints cannot be entertained in a petition under Sections 397/398 of the Act. This Board has been taking a consistent view that even though as a general proposition that directorial complaints cannot be entertained, yet, in cases of family companies, closely held companies and those which are in the nature of quasi partnership, directorial complaints can be entertained. In the present case, the admitted position is that the company was incorporated by the petitioner and 2nd to 4th respondents, being the signatories to the Memorandum and they were the first directors. It is also provided in Article 37 that they would hold office until he/she expires or resigns. It is also an admitted fact that all the four of them were actively involved in the affairs of the company. Thus, the company is not only a closely held company but also is in the nature of a quasi partnership and as such directorial complaints could definitely be entertained.
13. Provisions of Section 283(1)(g) of the Act can be invoked only if a director who has been issued notices for Board meetings does not attend the meetings, without the leave of absence, either in three consecutive meetings or all board meetings held within a period of 3 months. According to the respondents, the petitioner did not attend the board meetings on 1.9.2004 (two meetings), 14.9.2004, 31.12.2004 and 31.1.2005 in spite of notices having been sent under Certificates of Posting and also sent through a messenger. To substantiate the same, in the reply to the petition, they have annexed copies of the certificates of posting and also an affidavit from one Shri Rajesh Tada, an employee of the company stating that he had visited the residence of the petitioner for delivery of the notices and that the petitioner was not present and the family members refused to receive or acknowledge the same. The establishment of the factum of issue of notices as also the factum of holding Board meetings becomes very relevant in the determination of vacation of office by a director in terms of Section 283(1)(g) of the Act. The respondents, relying on Article 53(h), have contended that notices were attempted to be delivered through a messenger but since the family members refused to accept the same, they were sent by UPC. It was repeatedly pointed out by Shri Choudhary that the petitioner having absconded, was not available in the civil society and therefore had deliberately did not attend these meetings even though he must have received the notices sent by UPC from his family members. According to them, the petitioner went underground from 23.5.2004 when an FIR was filed against him. He referred to the various orders passed by the civil court as well as the High Court. It is the contention of the petitioner that he had not absconded and to substantiate the same he relied on the documents annexed with the additional affidavit. For me to decide whether the petitioner had absented from the meetings inspite of notice, the issue whether the petitioner was available in the civil society or not is not a material factor. It is a settled law that certificates of posting only raise a presumption of the letters having been posted and such a presumption is rebuttable. There is nothing on record to show as to whether sending notices by certificates of posting has been the normal mode of sending notices and if not, the reasons for suddenly resorting to issue of notices by certificates of posting to the petitioner has not been explained. Therefore, it is quite obvious that the notices were sent by UPCs, assuming they were actually sent, only for the purpose of creating records to establish that notices were sent. In such circumstances, any prudent person would have sent the notices not by UPC but by registered post so that the factum of sending the notices could be established as there would be unassailable record either in the form of acknowledgement if accepted or in the form of endorsement on the envelops with the remarks of either refusal or addressee not available. In the letter dated 18.11.2005 while informing the petitioner that he had ceased to be a director effective from 31.1.2005, there is no mention of Section 283(1)(g) of the Act. When the petitioner sought the grounds on which he has ceased to be a director by his letter dated 20.11.2005, in the reply dated 28.11.2005, the petitioner was informed that notices were sent by post and also that information was also passed on to his residence and office. There was no mention of the dates of the meeting which the petitioner allegedly did not attend. It was further stated in the reply that the petitioner absented himself continuously in five board meetings. This reply did not talk of certificates of posting nor the mode of passing on of the information to his residence or office. In the reply to the petition, there is no mention that the information was passed on to the office of the petitioner. Even in the further communication dated 12.12.2005, while giving the dates of the meetings, the fact of sending notices by UPC had not been specifically mentioned. The respondents have contended that the petitioner was informed as early as on 4.2.2005 that he had ceased to be a director under Section 283(1)(g) of the Act giving the details of the meetings. This also was reportedly sent under a certificate of posting. The very fact that this letter has not been referred to in their letters dated 18.11.2005, 28.11.2005 and 12.12.2005, no credence could be given to this letter. Further, as rightly pointed out by Shri Mookherjee, notice dated 23.1.2005 for the board meeting 31.1.2005 could not have contained the agenda item "Submission of from No. 32 in respect of cessation of directorship of Shri Sarabjit Singh Mokha under Section 283(1)(g) of the Companies Act". A very relevant aspect to be noted is that even though the board decided to file form No. 32 on 31.3.2005, yet, the same was filed only on 4.7.2005 i.e. after the petitioner surrendered on 1.7.2005, Even the affidavit of Shri Toda is suspect for the simple reason that he has not indicated in his affidavit the residential address of the petitioner which he had visited and also in view of the affidavit of Shri Thakur as pointed out by Shri Mookherjee. The respondents have neither produced the accounts of the company to indicate the postage paid on the alleged letters sent by UPC nor have produced the minutes of the board meetings allegedly not attended by the petitioner. In the first meeting held on 1.9.2004, one of the agenda items was to approve draft accounts. A copy of the same could have been enclosed with the reply to establish that the board did meet on that day. In the second meeting on 1.9.2004, one of the agenda items was to approve draft notice for the 7th AGM. There is nothing on record to show that the 7th AGM was convened or held in pursuant to the notice adopted. In the meeting on 14.9.2004, one of the agenda items was to execute an equipment loan agreement dated 14.9.2004. No document is on the record to establish that there was a meeting on this day. For the Board Meeting on 31.12.2004, all items related to review of the working of the hospital/company and the agenda for the board meeting on 31.1.2005 the only substantive matter included was to file form No. 32 regarding cessation of the petition as a director, which was filed only on 4.7.2005. Thus, in the absence of any material to establish that these board meeting had been held, it is very difficult to come to the conclusion that pursuant to the alleged notices for board meetings, the said meetings were held and the petitioner did not attend. Thus, not only the factum of sending the notices has not been established, even holding of the board meetings on these days, has not been established. Since it is the contention of the respondents that the petitioner was absconding, naturally even if notices had been sent, he would not have received them. Considering the fact that the company is a quasi partnership wherein the contribution of the petitioner both in terms of finance and otherwise with participation in the management, in all fairness the petitioner should have been granted leave of absence. Fairness and fair play are very important constituents in a quasi partnership. The respondents have contended that since the petitioner had been in active management, knowing fully well that the meetings have to be held periodically, he should have enquired from the company about the board meetings. This argument could have some validity if the respondents had produced evidence to establish that board meeting were periodically held earlier. I am observing so only because in many closely held companies, meeting are not held at regular intervals nor formal notices are issued for Board meetings. Even otherwise, when the law/Articles mandate that notices for board meeting should issued, it cannot be contended that a director should enquire about holding of board meetings. Therefore, I have no hesitation to come to the conclusion that the claim of the company/respondents that the petitioner had ceased to be a director in terms of Section 283(1)(g) of the Act has not been established beyond doubt.
14. In so far as allotment of shares to the respondents which resulted in reduction of the petitioner's shareholding from 25% to 10% is concerned, first I note that even though in the alleged offer dated 30.4.2005, it was indicated that the board had decided to allot shares in its meeting on 28.4.2005, a copy of the minutes of the said board meeting is not on record. The said minutes would have revealed the justification for issue of further shares. It is a settled law that for issue of further shares there should be a proper justification especially in closely held companies as that of the respondent company. No doubt, as per the offer letter dated 30.4.2005, proportionate shares had been offered to the petitioner, yet, since the stand of the respondents is that the petitioner was absconding, he would not have come to know of the offer. The respondents themselves have averred that the surrender of the petitioner in the court on 1.7.2005 was widely published. That being the case, the respondents were aware that the petitioner was in jail. Since allotment had not taken place till 5.7.2005 i.e. after the whereabouts of the petitioner were known, they should have kept the offer made to the petitioner pending instead of appropriating his entitlement among themselves, considering the fact that he is one of the original promoters of the company with equal shareholding. It is notwithstanding the fact that in the absence of any evidence that the board had decided to issue further shares in its meeting dated 28.4.2005 and that the factum of sending the offer through UPC on 30.4.2005 having been not conclusively established for the reasons I had indicated in the earlier paragraph relating to cessation of directorship. Therefore it is beyond doubt that the allotment of shares to respondents was made in exclusion of the petitioner only with a view to reduce his shareholding to 10%. The respondents have contended that since even with 25% shares, the petitioner was in minority, he cannot allege oppression that he had been reduced to a minority. Any disturbance in the shareholding in a quasi partnership is an act of oppression. 15.The very facts that the form No. 32 was filed only on 4.7.2005 even though according to the company the petitioner had ceased to be a director on 31.1.2005 and that the allotment was made on 5.7.2005, both after the petitioner surrendered on 1.7.2005 would clearly indicate that the respondents did not want the company to be associated with a person against whom a criminal case was pending and who was in jail. This is evident from the averment of the respondents in Paragraph 16 of the Reply wherein they have averred "A person when involved in a Criminal case is considered by the Society as a Criminal and it not only affects him but also affects any other Institution/persons with which he is connected and in this case, the company has suffered a lot by way of its reputation being tarnished in the eyes of the general public including the patients because of the petitioner being involved in a criminal case which also got a very wide coverage in the print and electronic media. In fact, for about a year the local media in Jabalpur was full of the particular criminal case in which the petition was involved and the petitioner's name was always highlighted in the head lines. This was not only detrimental to the image of the company but also detrimental to the interest of the company and other directors as well. It is significant to point out here that all the other directors of the company are highly qualified Medical Practitioners and they are Specialists in their own field and regarded by the Public and patients as very good professionals and also command respect in the society. It was only because of the petitioner being involved in the criminal case that the image of the company and its hospital nosedived to a great extent." From the above averment, it appears to me that apprehending that the image of the hospital would be tarnished in view of the criminal case against the petitioner, the respondents have resorted to fabrication of the documents to oust the petitioner from the company also to reduce his shareholding as soon as he surrendered on 1.7.2005 by filing Form 32 on 4.7.2007 (even though was dated as 31.1.2005) and by allotting shares on 5.7.2005. Therefore, the petitioner has established his allegations of oppression both in relation to his directorship as well as shareholding.
16. Having held that the petitioner has been oppressed, the question of relief arises. Shri Mookherjee contended that since the respondents are guilty of oppression, they should be directed to sell their shares to the petitioner and on the proposition that wrong doers cannot be allowed to take advantage of their own wrongs, he relied on Dale and Carrington case. He further submitted that as the premises in which the hospital is functioning belongs to the petitioner, he should have the right of control over the hospital. On the other hand, it is contended by the respondents that they being professional doctors and being majority shareholders, and having invested substantial funds in the company compared to the petitioner, they should be allowed to purchase the shares held by the petitioners.
17. In Dale & Corrington case, the Supreme Court only set right the wrongs committed and did not direct purchase of shares by the petitioner of those of the respondents who were the wrong doers. Therefore, this case cannot be advanced to claim the right to purchase the shares of the respondents by the petitioner. Considering the fact that while the premises belong to the petitioner who is a minority shareholder, the respondents being professional doctors holding collectively 75% shares in the company, I do not propose to pass any order regarding parting of ways other than reinstating the petitioner as a director and also directing the respondents to offer from each one of them such number of shares which would restore the holding of the petitioner to 25% on his making an application to the company. While doing so, I have taken into consideration the fact that the petitioner has been acquitted of all the charges in the criminal case and therefore the apprehension of the respondents that the association of a criminal with the hospital would tarnish the image of the hospital, no longer survives. On re-induction into the board, the petitioner shall be entitled to carry on with the same powers and responsibilities which he held before 23.4.2004. Even though the petitioner has made certain allegations of financial mismanagement, I do not consider these allegations of any material nature especially when the respondents have explained each allegation satisfactorily. I make it abundantly clear that if the parties decide on parting of ways on their own, this order would not stand in their way of doing so.
18. The petition is disposed of in the above terms without any order as to cost.