Company Law Board
Rashmi Seth vs Tillsoil Farms Pvt. Ltd. And Ors. on 4 August, 1992
Equivalent citations: [1995]82COMPCAS409(CLB)
ORDER
1. Mrs. Rashmi Seth has filed three petitions on September 24. 1991, and October 24, 1991, under Section 397/398 and Section 235/237 and 408 of the Companies Act, 1956, respectively, against Tillsoil Farms Pvt. Ltd. (hereinafter referred to as "the company") and Shri Chetan Seth (respondent No. 2) and Shri N.D. Tayal (respondent No. 3), directors of the company, alleging that actions of the respondents are highly oppressive to the petitioner and also prejudicial to public interest and against the interest of the company. Shri Chetan Seth is the husband of the petitioner.
2. The admitted facts of the case are as follows :
Tillsoil Farms Pvt. Ltd. was incorporated on June 10, 1983, by the petitioner, Mrs. Rashmi Seth, and her mother-in-law, Mrs. Nita Seth, who were the only subscribers to the memorandum and articles of association and were also the only two shareholders and directors of the company at the time of its incorporation. Out of the paid-up capital of 20 shares of Rs. 100 each, 10 equity shares were held by the petitioner and ten shares by Mrs. Nita Seth. Under articles 51 and 53 of the articles of association of the company, the petitioner and her mother-in-law were to be the first directors of the company and were to remain as permanent directors, not liable to retire. The primary business of the company is agriculture. In 1983, the company acquired 30 acres of land at Sohna, Haryana, for planting eucalyptus trees and in 1987, three acres of land was acquired at Vasant Kunj, New Delhi, for development of a garden centre. The petitioner and respondent No. 2 were married in January, 1976, and since December, 1989, the relations between the petitioner and her husband have become strained on account of the serious differences between them and they are living separately since August, 1990.
3. It is the case of the petitioner that she was fully and solely involved with all the ground work of the two projects and in obtaining sanction of building plan, development of land, etc. Since January, 1990, there have been no meetings of the shareholders or of the directors of the company as the records of the company have been taken over by Shri Chetan Seth, in his control and he has instructed the employees of the company not to follow the petitioner's orders or directions. She has been denied access to the company's office premises and the other director Mrs. Nita Seth has been in the U.K. since October, 1990. The petitioner has alleged that because of the strained relations between the petitioner and respondent No. 2, respondent No. 2 is trying to usurp the management and control of all family companies and their properties to the exclusion of the petitioner. Towards this end, he is continuing to fabricate and falsify the records of the company including that of the respondent-company. It has been alleged that as respondent No. 2 had access to the books and records of the company at its offices, he has fabricated the minutes to show the holding of general meeting of shareholders on November 30, 1990, at which various resolutions are alleged to have been passed whereby the articles of the company were amended, the petitioner and her mother-in-law, Mrs. Nita Seth, are stated to have ceased to be directors and in their place, respondents Nos. 2 and 3 were appointed as directors of the company. It is further pointed out that in the alleged board meeting held on September 14, 1990, it has been shown that 185 shares have been allotted to Mr. Chetan Seth and five shares to Rass Intratech Pvt. Ltd. This falsification of the records has been done with the sole intention and purpose of defrauding the petitioner and denying her of her rights of a shareholder and her control of the company. It is submitted that the articles of the company cannot be amended or altered except in terms of Section 31 of the Companies Act by passing a special resolution at the shareholders' meeting. As no meeting of the shareholders was ever held, any alleged minutes written in the minutes book of the company and any alleged resolutions recorded in the said minutes are illegal and null and void. According to the petitioner, no general meeting or any meeting of the board of directors was ever convened or ever held on November 30, 1990, or on September 14, 1990, respectively, as she had not received any notice of the meeting. It is further submitted that Article 16(b) of the articles of association of the company provide that if any new shares of the company are to be issued, the same shall be first offered to the existing shareholders in proportion to their respective shareholding in the company and, therefore, the allotment of 185 shares to respondent No. 2 and five shares to Rass Intratech Pvt. Ltd. are illegal and in contravention of the provisions of the articles of association. Allegations have been made in the petition that after the unauthorised and illegal take-over of the management of the company, respondent No. 2 is also trying to siphon off the properties of the company to his personal advantage.
4. The petitioner had filed a suit (No. 1432 of 1991) on May 2, 1991, in the High Court of Delhi for a declaration and permanent injunction to prevent respondent No. 2 from further tampering and falsifying the records and in the same suit, it has been ordered that the properties of the company shall not be alienated, transferred or dealt with till further orders of the court except in the normal course of business and the records of the company have been initialled by the private secretary of the High Court. In support of the allegations regarding fabrication of books of the company, the petitioner has filed photo-copies of the affidavit of Lt. J.N. Vohra, executive director and Shri P.C. Roy, accountant, who were in the employment of the company.
5. The petitioner has also filed a petition under Sections 235 and 237 of the Companies Act, 1956, seeking investigation into the affairs of the company to prevent the affairs of the company being conducted in a manner oppressive to the members of the company and prejudicial to the interest of the company and public interest. The petition under Section 408 of the Companies Act has been filed requesting appointment of Government directors, as the affairs are conducted in a manner oppressive to the members. The averments made in all the three petitions and the replies filed by the respondents cover the same issues and are similar. In view of this, with the consent of the parties, it was decided to hear all the three matters together and are being disposed of by this single common order.
6. Notices were issued to all the three respondents and a reply was filed by respondent No. 2 on behalf of all the respondents. Respondent No. 2 has filed an affidavit in December, 1991, stating that he is a director of the company and duly authorised to file the affidavit on behalf of the company. A copy of the resolution passed by the board of directors on June 14, 1991, authorising respondent No. 2 to make the written statement, replies, file affidavits, etc., has been filed. No separate reply has been filed by respondent No. 3.
7. It is the case of the respondent that the petition filed under Sections 397 and 398 is not maintainable as it is in the nature of seeking a relief of rectification of register of members rather than reliefs under Sections 397 and 398. It is also contended that since the petitioner has already filed a suit being Suit No. 1432 of 1991, before the High Court of Delhi seeking more or less identical reliefs and which is still pending, the petitioner cannot on the same grounds ask for reliefs under Sections 397 and 398 of the Companies Act. It was also submitted that after hearing detailed arguments at length, the High Court of Delhi has refused to grant any interim relief of appointment of local Commissioner or seizure of the books. However, the respondents on their own offered to produce books for period after December, 1989, which were returned to the respondents after due endorsements and signatures on each page of the document by the private secretary to the Hon'ble Court. It was further pointed out that while the basic cause for the petition is matrimonial discord between husband and wife, the petition has nothing to do with any violation of the Companies Act or associated provisions. According to the respondent the shareholding in the company is as follows :
Name No. of shares
(i) Mrs. Nita Seth 10
(ii) Mr. Chetan Seth 185
(iii) Rass Intratech Pvt. Ltd.5
(iv) Mr. N. D. Tayal, Director Nil
(v) Mr. Mark Werner, Architect 5
(vi) Dr. C. L. Dhawan, Agricultural specialist 5
8. In view of this, it was contended that as she no longer holds any shares of the company, she is not entitled to any relief under Section 397/ 398 of the Companies Act.
9. It is further submitted by the respondent that the petitioner was never seriously associated with the company for any substantial length of time nor did she undertake any major responsibilities. She herself insisted on being completely dissociated with all the business operations and after the tax investigation, she withdrew totally from the company. As Mrs. Nita Seth was mostly not in India and in view of the withdrawal by the petitioner, respondent No. 2 as well as another professional, Mr. N.D. Tayal were inducted on the board of directors, at the meeting of the board of directors dated August 17, 1990. It is also submitted that the induction of these directors was proposed by the petitioner herself and the notice of the meeting was also issued by the petitioner. It is also pointed out that Form No. 32 regarding induction of new directors and return of allotment evidencing allotment of 185 shares to respondents Nos. 2 and 5 shares to Rass Intratech Pvt. Ltd., vide minutes of the meeting of the board of directors dated September 14, 1990, were signed by the petitioner. It is further submitted that the petitioner also withdrew her share application money lying with the company, and also issued a power of attorney dated July 20, 1990, to respondent No. 2 to deal with the affairs of the company and to expedite her total withdrawal from these companies, especially, after the income-tax incident. While even after the issuance of the power of attorney, respondent No. 2 continued to ask the petitioner to sign all papers, towards the end of September, 1990, she insisted on completely withdrawing from the company, after respondent No. 2 had been formally inducted into the company. It is in consonance with these decisions, that 10 shares of the petitioner were transferred to Mr. Mark Werner and Dr. C.L. Dhawan, who are professionals. Regarding the amendment of the articles, it has been pointed out that the articles of association were amended by following due procedure to provide for retirement of directors by rotation at the end of each annual general meeting. Regarding allotment of 185 shares to respondents Nos. 2 and 5 shares to Rass Intratech Pvt. Ltd., it has been stated that these allotments have been made at the meeting of the board of directors held on September 14, 1990, in which the petitioner was present. At the same meeting, it was resolved to amend the articles to provide for retirement of directors and to this end, an extraordinary general meeting of the company was convened on September 27, 1990, and the petitioner was given notice of the extraordinary general meeting. It is also mentioned in the reply at page 18 that the petitioner was present in the meeting on September 27, 1990. The company has also filed Form No. 23 with the Registrar of Companies on October 19, 1990, indicating the alteration made in the articles of association. Regarding transfer of 10 shares of the petitioner, it is stated in the petition that she was present at the board meeting held on September 27, 1990, and had consented to such transfer and has thus ceased to be a shareholder from that date, In view of the above, the contentions of the petitioner that she "came to know" that she has ceased to be a director and that she was not aware of the transfer of shares or amendment of articles are incorrect, as she was present at these meetings and therefore, there is no case of oppression and the petitioner has not come before the court with clean hands. In this connection, the respondent has relied on the petitioner's letter dated September 17, 1990, in which she has asked respondent No. 2 to take steps to give effect to her decision to sever relationship with all the companies at the earliest.
10. Arguments on behalf of both the parties were heard on February 12 and 13, 1992. Shri Rajive Sawhney, counsel for the petitioner pointed out that the issue of shares in favour of the respondents is in gross violation of Article 16(b) which provides that new shares shall be offered first to the existing shareholders. He also pointed out that removal of the petitioner as director is also in violation of articles 51 and 53, as she is a permanent director. He also pointed out that the amendment to the articles at the extraordinary general meeting held on September 27, 1990, is bad in law, as no notice was given to her. Most of the crucial decisions have been taken at the board meeting alleged to have been held on September 14, 1990, at which the respondents have claimed that the petitioner was present and in the minutes, it has been recorded that some of the proposals have been moved by her. Shri Sawhney pointed out that this clearly shows that the records have been fabricated as no board meeting was held on September 14, 1990, and the petitioner was not present and she was at Bombay, on that day. Regarding transfer of 10 shares to Mr. Mark Warner and Dr. C.L. Dhawan, it was submitted that the petitioner has misplaced her shares and as per share transfer deeds produced, the same have been signed on behalf of the petitioner by Shri N.K. Jain, as her constituted attorney, although the petitioner has never appointed Shri N.K. Jain as her constituted attorney. It was further argued that the power of attorney dated July 20, 1990, given by her to Shri Chetan Seth does not empower him to transfer her shares. Shri Sawhney argued that as the transfer forms are not signed by the transferor or her duly constituted attorney, the alleged transfer cannot be registered as the provisions of Section 108 of the Companies Act are mandatory.
11. Shri Srinivasan, counsel appearing on behalf of the respondent stated that in 1987, when a raid was conducted by the income-tax authorities at the premises of the company and house, the petitioner had stated that she was not interested to have in any way associated with the affairs of the company. In December, 1989, the relations were strained between her and her husband and in July, 1990, she gave a power of attorney in favour of Shri Chetan Seth. It was also pointed out that from August, 1990, the petitioner is living separately. Regarding the contention of the petitioner that she was not present at the board of directors meeting held on September 14, 1990, and, therefore, the board minutes are fabricated, counsel admitted that the petitioner proceeded to Bombay by the Air-India midnight flight on September 13, 1990, arid she was not present at the board meeting held on September 14, 1990 ; but the fact remains that she filed the return of allotment on September 14, 1990, with the Registrar of Companies on the same day. Counsel could not reply to the query from the Bench how it was possible for her to return from Bombay and be available on September 14, 1990, to sign the return of allotments, and file it with the Registrar of Companies on the same day. Referring to the power of attorney given by the petitioner, Shri Srinivasan argued that it is clear from the terms of the power of attorney that Shri Chetan Seth was empowered to sell her shares. Regarding Shri N.K. Jain's signatures on the transfer form as the petitioner's constituted attorney, Shri Srinivasan explained that Shri Chetan Seth had in turn given a power of attorney to Shri N.K. Jain, auditor of the company, to sign on her behalf as a transferor on the transfer deed. We directed counsel and the respondent to produce the power of attorney given in favour of Shri N.K. Jain. However, counsel was not able to do so. Shri Sawhney, in reply, pointed out that the petitioner had signed blank return forms which were used for filing the return about the allotment of shares. We had also directed the company and the respondent to file a statement indicating sources of funds for payment of land at Sohna and Vasant Kunj. The statement was submitted by the respondents indicating sources and application of funds and the details of persons who have made contribution. It is clear from these statements that the bulk of the money has been given by Mrs. Rashmi Seth and her daughters.
12. We have carefully considered the arguments of counsel for the respondent on the issue of maintainability of the petition. His objections are based mainly on three grounds, firstly, that the petitioner is no longer a shareholder, secondly, the main relief asked for is in the nature for rectification of the register of members for which she cannot invoke the provisions of Section 397/398 of the Companies Act and thirdly, the petitioner has already moved the High Court for similar reliefs on substantially the same grounds and she cannot start parallel proceedings.
13. It is an admitted fact that the petitioner is a promoter-director of the company holding 50 per cent. equity shares of the company till the alleged transfer took place on September 27, 1990. As per articles No. 51/53, she is also a permanent director. A decision to amend the articles is alleged to have been taken at the meeting of the board of directors held on September 14, 1990, and approved at the extraordinary general meeting held on September 27, 1990. The petitioner has challenged the alleged transfer approved by the board on September 27, 1990. We have looked at the original transfer forms and we have found one Shri N.K. Jain has signed on behalf of the petitioner. Before effecting this transfer on September 27, 1990, in the board meeting held on September 14, 1990, the board approved the issue of duplicate share certificates to the petitioner. The petitioner had denied attending the meeting held on September 14, 1990, or requesting for issue of duplicate share certificates. It has been admitted at the Bar by counsel for the petitioner that the petitioner was not present at the board meeting held on September 14, 1990. A copy of the minutes of this board meeting has been filed by the respondent which not only shows that the petitioner was present, but that certain items were proposed by the petitioner. Out of eight items considered at the board meeting, her name is mentioned in five resolutions relating to allotment of 185 shares to Shri Chetan Seth and five shares to Rass Intratech Pvt. Ltd., issue of duplicate share certificates, alteration of Article53 of the articles of association of the company, the status of the working of the company and closure of bank account. Considering that now it is an admitted fact that the petitioner was not present at this meeting, there is no doubt in our mind that these resolutions are null and void and non-operative. There is nothing on record to show whether the petitioner had notice of this meeting. It is clear that the minutes are fabricated, the resolutions passed at the alleged meeting are invalid and issuing of duplicate share certificates unauthorised. Similarly, the petitioner had never given any power of attorney to Shri N.K. Jain to sign on her behalf on share transfer forms. The explanation given by the company that the petitioner had given power of attorney to Shri Chetan Seth and he, in turn, gave authority to Shri N.K. Jain to sign on her behalf is neither supported by documents in spite of our specific directions to this effect, nor is legally tenable as Shri Chetan Seth cannot delegate authority given to him to another person unless there is an express authorisation in the document to this effect.
14. In view of the above conclusions regarding the illegality of issue of duplicate share certificates and non-compliance with the provisions of section 108 of the Companies Act regarding the transferor's signature or that of her duly constituted attorney, we hold that the transfers given effect to by the board of directors on September 27, 1990, are in contravention of the Companies Act, and since these provisions are mandatory, the transfers are invalid. While arriving at this conclusion, we have noted that respondent No. 2 is in control of the books of the company and in a position to manipulate the same. Illegal transfers effected in the register cannot take away the petitioner's title and right to take action as a shareholder. We, therefore, hold that the petitioner is a shareholder holding 10 shares in the company.
15. Regarding the second point whether the petitioner's holding of 10 shares constitutes 10 per cent. of the shareholding of the company, we find that the allotment of 185 shares to respondents Nos. 2 and 5 shares to Rass Intratech Pvt. Ltd. at the meeting of the board of directors alleged to have been held on September 14, 1990, is not only in violation of Article16(b) of the articles of association ; but is void ab initio, as we have already held that the resolutions passed at the board meeting held on September 14, 1990, are null and void. In view of this, the effective share capital of the company consists of only 20 shares and since the petitioner is holding 10 shares, she fulfils the criteria prescribed under Section 399 of the Companies Act for filing a petition under Section 397/398 of the Companies Act.
16. Regarding the third objection of the respondent that these proceedings constitute parallel proceedings which the petitioner cannot invoke as she has already moved the High Court for similar reliefs on substantially the same grounds, we have gone through the copies of various documents including a copy of the petition filed in the High Court proceedings, and also noted the statement made in the rejoinder by the petitioner that she is going to move the High Court for withdrawal of the petition. We hold that the reliefs sought and the grounds mentioned in the present petition are much wider in scope and initiating the High Court proceedings for some of the reliefs will not bar the right of the petitioner to seek these reliefs. In view of this, we hold that the petition under Section 397/398 is maintainable.
17. The petitioner's case regarding oppression and mismanagement is based mainly on the grounds that respondent No. 2 has taken forcibly the control of the books of the company, fabricated documents first to reduce her status of majority shareholder to a minority shareholder, then illegally transferred her shares and modified the articles of association of the company to deprive her of her status as permanent director with a view to enable him to exclusively deal with the property of the company for getting personal benefit. It is also stated that these facts would justify the passing of a winding up order on just and equitable grounds ; but such an order would unfairly prejudice the petitioner. All these alleged grounds have been substantiated and we have already held that the transfer of shares approved by the board of directors on September 27, 1990, is illegal and void and allotment of shares to respondent No. 2 and Rass Intratech Pvt. Ltd. is against the provisions of the articles of association and the minutes of the board of directors meeting held on September 14, 1990, at which allotment of shares was made are admittedly fabricated as the respondents have admitted that the petitioner was not present at the meeting though she has been shown as present, and also having participated in the meeting. The respondents have filed a statement of payments made for land at Sohna and also the position of the share application account on the basis of accounts for the year 1983-84. It shows that almost all the money for the business of the company has been brought in by the petitioner and her daughters and respondent No. 2's financial interest in the company is limited to his investment of Rs. 100 each in 185 shares allotted to him on September 14, 1990. We have also carefully considered the arguments advanced by counsel for the respondent that it is clear from the power of attorney executed by the petitioner on July 20, 1990, in favour of respondent No. 2 that she had entrusted to him all the work connected with all the family companies and her letter dated September 17, 1990, makes it clear that she wanted to be dissociated with all the companies. It is contended that even if it is conceded that the petitioner was not present at the board meeting held on September 14, 1990, all the proposals passed were as per her desire and the petition filed in Section 397/398 proceedings is an afterthought. The petitioner has challenged the authenticity of the letter dated September 17, 1990. The contents of the letter are as follows :
"Dear Chetan, I write to remind you to return to me the share application money, as I am not interested in holding any shares as discussed. I am constrained to state, that you have still not taken any action in this matter and also towards removing my name from all your various companies.
I am in the least interested in signing any papers, and I will appreciate, if you could arrange to have the money that is lying to my credit in Tillsoil Farms, transferred to my bank account immediately.
I do hope you will now take this matter seriously as we have been talking about all this for much too long. Kindly let me know as soon as you have taken the necessary actions to settle my personal matters.
Thanking you, Yours sincerely, (Sd.) Rashmi Seth."
18. It is an admitted fact that marital relations between the petitioner and the respondent had taken an adverse turn since December, 1989, and they are living separately since August, 1990. It is also an admitted fact that efforts were being made to settle matters between them by negotiation. The power of attorney dated July 20, 1990, and the letter of the petitioner dated September 17, 1990, are to be considered in the context of these circumstances. In any case, neither the power of attorney nor the letter of the petitioner are part of the record of the company and are not relied on by the company for allotment of 190 shares on September 14, 1990, or approval of the transfer of the petitioner's shares on September 27, 1990, which have been held null and void for not complying with the provisions of the Companies Act/articles of association. In any case, these documents do not entitle the company or respondent No. 2 to dispense with the mandatory provisions of the Companies Act or take away the rights of the shareholder given by the articles of association.
19. In view of our above findings, we set aside the allotment of 190 shares made on September 14, 1990, and the transfer of the petitioner's shares approved by the board of directors on September 27, 1990, and direct that an extraordinary general meeting be called and a new board of directors be elected on the basis of the shareholding as it existed prior to September 14, 1990. Meanwhile, in order to manage the affairs of the company, as per the provisions of the Companies Act and the articles of association of the company, we reconstitute the board of directors, effective from the date on which this order is served on the company, with the following three directors :
1. Smt. Rashmi Seth,
2. Smt. Nita Seth and one more person who will act as chairman of the company.
20. In view of this order, we do not think that any separate orders are required to be passed in the other two petitions filed under Section 235/ 237 and 408 of the Companies Act.
21. In respect of another family company, Chemon (India) Pvt. Ltd., similar disputes were agitated before this Bench and that case was also heard along with this case. We have had the occasion to consider suggestions for appointment of an independent chairman made by the parties in the correspondence exchanged with them between May 25, 1992, and July 15, 1992, in that case. Considering the suggestions made, we appoint Justice (Retired) M L. Jain, who has given his consent, as chairman of the company on a fee as may be decided by him and paid by the company. The company will render all co-operation to the independent chairman in discharge of his function. He will call a meeting of the new board of directors as early as possible ; but not later than eight weeks from the date of receipt of the order and take possession of all the books of the company. He will also take steps to call an extraordinary general meeting of all the shareholders for the purpose of electing a new board of directors.
22. While the case was heard by three members including Shri A.M. Chakraborti, he was not present in the final stages of hearing and he ceased to be a member of the Company Law Board with effect from May 15, 1992. Regulation 4 of the Company Law Board Regulations, 1991, provides that the principal Bench will have not less than two members including the chairman and, therefore, in view of the aforesaid circumstances, this final order is being passed by the two member Bench.
23. Let a copy of this order be also served on all the directors and the independent chairman.
24. There will be no orders as to costs.