Company Law Board
Mr. Suresh Arora vs Grevlon Textile Mills Pvt. Ltd. And Ors. on 7 June, 2007
Equivalent citations: [2008]142COMPCAS963(CLB), [2007]80SCL228(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 50 of 1995 filed by Shri Suresh Arora against the R-1 Company namely, M/s Grevlon Textile Mills Pvt. Ltd. and Others under Sections 397, 398 read with Sections 235 of the Companies Act, 1956 (hereinafter referred to as 'the Act') alleging various acts of oppression being perpetrated by the Respondents and citing a number of instances of mismanagement in the company by respondents and had seeking a direction that an investigation into the affairs of the company be directed by the Hon'ble Company Law under Section 235(2) of the Companies Act.
2. The undisputed facts of the case are: M/s Grevlon Textile Mills Pvt. Ltd. was incorporated as a Private Company on 11.12.1987 having its Regd. Office at 24-B, Trimurti Co-op Housing Society Ltd., North Avenue, Santacruz (W), Bombay-400054. The authorised capital of the company was Rs. 10 lakhs comprising of 10,000 shares of Rs. 100/- each. Subsequently, the authorised capital of the company was increased by a further 2000 shares and the present authorised capital of the company is Rs. 12 lakhs divided into 12,000 shares of Rs. 100/- each. The main objects of the company is to carry on in India and /or elsewhere in the world as Textile Manufacturers, twisting and texturising of fabrics, Exporters, Importers, Distributors, dealers, Traders, Commission Aents, Brokers, Adatias, Collectors in respect of Sports Goods, Woollen Textiles, Hosiery and Knitted Fabrics, Coir products, Cotton Textiles, Readymade Garments, Natural Silk Garments etc. The petitioner is a shareholder and Director of Respondent No. 1 company, M/s Grevlon Textile Mills Pvt. Ltd. R-2 is the brother of the petitioner and is the Chairman of the Respondent company, while respondent No. 3, who is the wife of R-2, is the MD of Respondent company. The petitioner holds 5210 shares of respondent company which constitutes approximately 43.47% of the paid-up capital of the company.
3. Shri Rahul Sharma, Counsel for the petitioner pointed out that the Respondent company is a family company in the nature of quasi-partnership. It was agreed and understood amongst the parties, that R-2 and 3 who were based in Mumbai would be looking after the day-to-day affairs and management of the company including production and sale in Mumbai and adjoining areas whereas the petitioner who is not well educated would look after sales of the company's products in North India. It was pointed out that the major market for the product of the company is in the hinterland and it was the responsibility of the petitioner to locate buyers for the products there as the petitioner was stationed at Mathura, UP. Prior to 1987(the year of company's incorporation) the petitioner and R-2 and 3 were carrying on their separate business. In 1987 it was decided that petitioner and respondent No. 2 and 3 would conduct their businesses together. Article 27(B) of the Articles of Association of the company clearly provided that the petitioner and respondent Nos. 2 and 3 would be the first directors of the company who would be permanent directors and would continue to act as Directors. Taking advantage of the fact of petitioner's absence from Mumbai in connection with the business of the company and of the implicit trust and faith which the petitioner had reposed in them, the respondents completely took over the affairs of the company and started marginalizing the petitioner from the affairs of the company and by the end of 1989 completely ousted the petitioner from the management and affairs of the company. The petitioner did not receive any notice of any Board meeting or the General Body meeting of the company after 1989 and despite his repeated requests for inspection of hooks of accounts and the statutory books of the company, the same was denied to the petitioner. However, the petitioner due to the respect for his elder brother continued to render services for the company and was even paid salary of Rs. 3,000/- per month till March 1991. In violation of the agreement between the parties that the parties would not carry on their erstwhile business of commission agents in their individual capacity and that all such commission business would be conducted through the R-1 company, the R-2 and 3 not only carried out independent business as commission agents but also carried out competing business through their private concerns (proprietorships and partnerships) in complete breach of their fiduciary duties as directors.
4. The counsel for the petitioners pointed out that R-2 and 3 have been siphoning off the funds of the respondent company through their various private and benami concerns. All these 29 concerns have their offices and are said to carry on their business from the same premises as the registered office of the respondent company which approximately measures 200 sq.ft. It was pointed out that proprietor of some of these concerns are minors and are relatives of respondent Nos. 2 and 3 and that the fact of existence and ownership of these concerns has been admitted to by the respondents.
5. The modus operandi evolved by the respondents to siphon off moneys due to the company was found to be as under:
a. The goods were received by the connected concerns and the same were not accounted for in the stock register of the company. The challans are made by the suppliers directly in the name of the above mentioned concerns and the bills were raised accordingly. However, when the bills were received in the name of connected concerns,R-2 and 3 tampered with the said bills and substituted it by the name of the company and made the payments accordingly from the company's account. In this manner, the goods for which the company had paid were never received by the company and were, in fact, dealt with by R-2 and 3 and their other concerns.
b. Fictitious bills were raised for which payments were made in cash by the company and in this manner the funds were defalcated from the coffers of the company.
c. Goods were dispatched directly by the respondents to customers. However, bills for the same goods were raised by the connected concerns and the payments are made by the customer directly to the above mentioned concerns. In this manner, moneys that should have been received by the company were received by the connected concerns. It was pointed out that there are instances where the Bank Accounts of the concerns may only have receipts on account of the sales and mere payments towards purchases. The same are conveniently withdrawn in cash from the Bank Accounts of such concerns.
d. The goods were dispatched directly to the customers, but the billing is done by the connected concerns at a price agreed between the customer and R-2 and 3. The company, in turn, raises a bill on the connected concerns at a much less value, thus ensuring that the profits of the transactions are clearly received in the name of connected concerned and not the company.
e. Stock of the company is sold to connected concerns as rates at a negligible fraction of its value, thus the goods were transferred from the stocks of the company to that of the connected concerns. The wastage shown by the company thus is extremely high and contrary to the norms and projections made by the company in its various returns to the funding agencies. The invoices were fictitious and manufactured and raised on the respondent company so that money can be siphoned off from the company for payment against the fictitious invoices.
f. Details for job work were raised on the connected concerns and the challan for dispatch of goods was made, indicating that the goods on which the job work was done are returned. However, in fact, there is no corresponding entry for receipt of goods. The modus of raising bills for job work is, in fact, the method for pilfering the goods.
g. Bills are raised by the company on the connected concerns for goods transferred to the said concerns (which, as stated earlier, was at a lesser price than the market price). The said goods were further sold on credit for which the related concerns drew bills of exchange (Hundies). The said hundies were then discounted by the company with the banks and discounting charges for the period of credit were paid by the company. In the above manner, it was ensured that full credit is made available to related concerns at the cost of the company.
h. It was argued that a perusal of the bills would show that the goods sold genuine parties are priced nearly 30% more than the goods transferred by the company to the connected concerns.
6. Further, it was argued, fictitious creditors of the respondent company were shown to launder funds. Most of these creditors were either of modest means and in some cases were even minors and it is unlikely that these persons would have entered into any kind of transaction with the respondent company. The attention of this Hon'ble Board was invited to the names at entry Nos. 23, 24, 33, 43, 44 who were all aged between 6 to 10 years and were stated to be creditors of the respondent company. Further, the petitioner had at Annexure L pages 16 to 198 annexed the certificates and affidavits of some of these creditors certifying that they have not loaned any money to the company, nor supplied any material.
7. Further, it was argued, R-2 and 3 have released the premises occupied by the company as its regd. Office and have deprived the company of it valuable property for personal enrichment and gain. In fact, the respondents have admitted to the sale of machinery and the factory of the respondent company.
8. It was argued that the affairs of the company are being mismanaged and the accounts of the company are being defalcated to siphoning off moneys from the company for the personal enrichment of the respondent Nos. 2 and 3 in complete breach of their fiduciary duty and the affairs of the company are being conducted in a manner which is not only oppressive to the petitioner but is also prejudicial to the interests of the company and its shareholders. It was argued that the dealings of respondent Nos. 2 and 3 lack probity and fairness and it is imperative that an investigation under Section 235(2) of the Companies Act be directed into the affairs of the respondent company from its inception till date. It was prayed that R-2 and 3 be held guilty of various acts of oppression and mismanagement and be removed as Directors of the respondent company and be injuncted from acting as Directors or conducting the affairs of the company in any manner.
9. Further, without prejudice to the foregoing and to the rights and contentions of the petitioner, it was prayed that the petitioner with a view to amicably resolve the disputes the R-2 and 3 be directed to return and pay the investment made by the petitioner in the respondent company amounting to Rs. 5,21,000/- along with interest @ 15% per annum from the date of investment till the date of payment.
10. Shri P.K. Mittal, Counsel for the respondents pointed out that R-2 i.e. Mr. S.D. Arora, started the Commission Agency business of Cloth and Synthetic fabric as early as 1969 at Mathura, UP and R-2 has established himself in the Commission Agency business over a period of time. By the year 1979, the R-2 has completely established himself in the Commission Agency business of cloth of all types and was looking for greener and bigger pastures. Accordingly, in the year 1979 R-2 migrated to Mumbai - Mumbai being commercial capital of India and is a commercial hub of textile and cloth business. From 1979 to till 1987, the R-2 has established himself in the Commission Agency business of cloth and the said business was being done under the banner of Sole Proprietorship firm of R-2 and 3 (i.e. R-3 being wife of R-2). The R-2 and 3 (team of husband and wife) had been representing all leading Textile Companies. On the contrary, the petitioner had started a firm by the name of M/s Suresh Cloth House in the year 1982 at Mathura which was wound up in March, 1985. Subsequently, the petitioner started another firm by the name of M/s S. Kumar and Company in January, 1986 and the same got wound up in December, 1986. Prior to 1984-85, the petitioner had no taxable income. Even for the period 1983-84 to 1987-88, the petitioner did not have any taxable income. The Income Tax returns for the years 1983-84 to 1987-88 were filed in one go in 1987-88 for all previous years within a period of one month showing agricultural income, gift from neighbors and strangers and miscellaneous business income as LIC agent. In the Income Tax Return of 1987-88, the income and wealth was generated and not earned by the petitioner. Till about 1987, the petitioner had neither established the source of income nor wealth.
11. Further, the counsel for the respondents pointed out that the petitioner has falsely alleged that he was not incharge and responsible for operation of the company and has looked after only sales. The petitioner only drew salary for the period 1.4.1989 to 31.3.1992 and the R-2 and 3 did not draw any salary from R-1 company. In fact, ex-employees of the R-1 in their affidavits have averred that the petitioner was in-charge and responsible for all the affairs of the R-1. He was a resident of Mumbai. It was pointed out that the petitioner had himself signed various production returns, documents and papers in his own handwriting. Invoices under his signature for the period 1998 to 1991 (refer page No. 173 to 197 of the sur-rejoinder). The petitioner himself had signed the invoices where discounts had been offered to various parties.
12. Further, the counsel for the respondents pointed out that the Annual Accounts right upto the financial year 1994-95 had been audited by the Statutory Auditors and later on subject assessment under the Income Tax Act, 1961. The Annual Accounts for the year 1987-88 to 1994-95 had been subject to assessment by the Sales Tax Authorities also and in all assessment orders, there is no whisper of any of the allegations levelled by the petitioner. The petitioner himself appeared before the Income-Tax authorities and Sales Tax Authorities and Sales Tax Act The petitioner had approached outside parties/firms to find out as to whether any inter firm transaction had not been properly accounted for or entered into but none of the parties had supported the 'false theory' of the petitioner.
13. Further, the respondents explained that it is submitted that there was no Agency Commission Agreement between the R-1 i.e. M/s Grevlon Textiles Mills Ltd and other Textile Manufacturers for payment of Commission to R-1 from whom commission had come. In fact, R-2 had been dealing with those companies (even before the incorporation of R-1) had requested those companies to give credit towards commission to R-1 (which otherwise was payable to firms of R-2 and 3) since the R-1 was not doing well under the captaincy of the petitioner. Regarding the petitioner's allegation that inter-firms transaction with various parties had not been properly accounted for, it was pointed out that the petitioner himself has either given loan or had taken loan or gift or accepted loan and gifts from those parties and none of the parties had supported the 'theory' of the petitioner.
14. Further, it was pointed out by the counsel for the respondents that the company had outstanding liability of Rs. 54,00,000 in the financial year 1993-94. It was explained that at the time of sale of land and building, the valuation by an independent valuer was done, approval for sale was obtained from the local Govt. and the Sales Price was also approved by the local Govt. An independent valuer has valued land, plant and machinery and other fixtures. It was pointed out that an Agreement between M/s Grevalon Textiels Ltd. (R-1) and M/s Gujarat State Financial Corporation was signed by the petitioner No. 1 and R-2 for and on behalf of R-1. In the year ending 31.3.1993, the loan given by respondent No. 2 and 3 to R-1 was Rs. 7,05,326/-. Since the liability towards FIs, banks, secured and unsecured creditors were to be discharged, the R-2 and 3 brought further loan and the loan as on 31.3.1994 was to the tune of Rs. 11.3.956/-. Furthermore, it was argued that the petitioner had forged and fabricated a letter dated 2.5.1994 to contend that the petitioner offered a price of Rs. 60.00 lakhs for sale of the land, building, plant and machinery. In the year 2000, at the time of final arguments, the petitioner had reiterated and reemphasized his offer of Rs. 60 lakhs. The R-1, 2 and 3 had taken upon this task of persuading the buyer to sell the land, building and plant and machinery at a price of Rs. 60 lakhs to the petitioner. Before the Company Law Board, the petitioner sought time to arrange Rs. 60 lakhs and the matter dragged practically for two years to enable the petitioner to arrange Rs. 60 lakhs. Ultimately, the petitioner raised his hands and refused point-blank to purchase at Rs. 60 lacs, however, from the day one, he knew that he was making a false statement.
15. Shri P.K. Mittal, Counsel for the respondents argued that in the petition, the petitioner has attached photocopy of some of the invoices pertaining to the period 1989-90 and also some period of 1991. It was pointed out that the petitioner had annexed photocopies of the invoices, delivery challans to falsely shown sale of company's goods at a lower price when he himself was incharge and responsible for day to day affairs of the company. It was pointed out that the petition has been filed in Dec. 1995. The petitioner has not attached a single document for the period 1992-93 and 1994-95. Raising the issue of documents of 1991 in the year Dec. 1995 under the present petition is totally and completely time barred. It was pointed out that the petitioner has cheated his own friends and relatives and made false statements. It was pointed out that all the shareholders had sworn affidavits swearing that the affairs of the R-1 have been conducted by R-2 and R-3 by following the established and sound business practices and the shareholders had received the notice of AGM and the shareholders had reposed their full faith, trust and confidence in R-2 and 3. It was pointed out that M/s Gupta and Associates, Chartered Accountants had certified that all loans had been repaid by R-1.
16. Further, it was pointed out by the Counsel for the respondents that it was only the petitioner who was the whole-time director of the R-1 and had drawn salary from R-1 during the period upto 1992. No other director (including R-2 and R-3 had acted as whole time director and nor had drawn any salary. It was agreed among the directors that in case any of the Directors/Shareholders gives a loan to R-1 company, they shall not be entitled to any interest over the said loan. It was because of this reason only the petitioner in his personal balance sheet for the period March, 1989 to March 1993 had not shown any interest income earned or to be earned from the loan. It was pointed out that the petitioner had stolen the cheque Book and filled cheques for an amount of Rs. 55,38,250/-. These cheques were signed by Mrs. Radha Arora and the cheques had been issued by M/s Radha Textile Agency. Sole Proprietorship firm of Mrs. Radha Arora (R-3). These cheques had been presented by the petitioner in the Bank for encashment. After the R-2 and 3 came to know about the theft of the cheques, they had advised their bankers to "Stop payment". Accordingly, these cheques had been dishonored. It was alleged in the legal notice dated 1.6.1994 that these cheques were given as consideration of (a) dissolution of partnership firm known as GEE AAR SILK MILLS and also M/s Grevlon Textile Mills P. Ltd. (R-1). On the other hand in the suit for recovery of money filed by the petitioner before the Hon'ble Mumbai High Court against the R-1 to R-3 , the petitioner has taken the stand that the cheque of Rs. 15 lakhs and Rs. 8.00 lakhs is given against loan account of M/s Grevlon Textile Mills P.Ltd. Further, Mr. Jagat Kaushik, Chief Manager, Oriental Bank of Commerce, Santa Cruz Branch, Mumbai, in his deposition on 7.9.2005 before the Court at Mathura in a proceedings under Section 138 of NI Act, has averred that M/s Gee Aar Silk Mills is an existing firm and Mr. Suresh Arora is entitled to operate the bank account of the said firm. Further, while working as whole-time director of the R-1 company, the petitioner has siphoned off the funds, extracted money from raw material suppliers and has received cash from various parties. All these ill-gotten money has been parked into two bank account namely Hongkong and Shanghai Banking Corpn. And Dena Bank.
17. Further, the counsel for the respondents pointed out that when the petitioner was confronted that these undisclosed bank accounts wherein the ill-gotten money has been parked (not disclosed to the Income Tax Authorities), the petitioner had simply said that these accounts were opened at the instance of R-2. From the perusal of the bank account (unexplained), it is clear that number of deposits (in cash) has been made by the petitioner in his bank account.
18. Further, it was pointed out that the petitioner had falsely alleged that he had been ousted from R-1. The petitioner was whole time director right from Dec, 1987 to 1992 and has drawn his salary in that capacity. Even upto March, 2004 and also till today he was also one of the signatories to the bank account of R-1 as certified by the Oriental Bank of Commerce vide certificate dated 2.3.2006. It was pointed out that even as on date, the petitioner is a director of R-1.
19. It was pointed out by the counsel that the petitioner had forged a letter dated 6.10.1987 shown to have been written by Mrs. Radha Arora, R-3 on the letterhead of M/s Grevlon Silk Mills. On this letter, the petitioner had tried to build up a case that the respondents would close down all their well established firms and will look after only the commission agency business and the entire commission business shall be done under the banner of R-1. This letter was a total forgery in view of the fact that from the year 1987-94, the letter heads of M/s Grevlon Silk Mills were of different pattern, another letter dated 7.7.93 written by M/s Grevlon Silk Mills addressed to Manager, Oriental Bank of Commerce under the signature of Mr. S.D. Arora as Attorney of Mrs. Radha Arora (R-3). The letter head on which the letter dated 24.4.1994 is alleged to had been written by Mrs. Radha Arora to the petitioner were in fact the letterhead being used in the year 1988. It was pointed out that the petitioner had forged another letter dated 31.7.93 on the letterhead of M/s S.D. and Co. He had shown that Mr. S.D. Arora, R-2 had acknowledged his liability to the petitioner vide letter dated 26.5.1994. Further, it was pointed out that the petitioner had himself admitted that he had stolen company's records, vouchers and registers. Admittedly, no director has any legal right to remove statutory records/registers from the Regd. Office of the company. My attention was drawn to a FIR filed by Mr. Prem Prakash Khurana against the petitioner because he had failed to return the signed cheques. It was the petitioner who abandoned the R-1 like an orphan without discharging statutory and nonstatutory liabilities, by sale of plant, machinery and asset of the R-1 company in the year 1993 and 1994, liabilities of the Financial Institutions, banks and workers were paid back/discharged and from 1995 the R-1 is a Company on paper.
20. I have considered the pleadings and the documents filed therewith as well as the arguments of both the counsels. This is a case of a closely held company in the nature of quasi-partnership. The petition has been filed by the younger brother against his elder brother and sister-in-law being R-2 and R-3. There are allegations and counter allegations. The petitioner has pointed out detailed mismanagement including escapement of taxable income revealing the modus operandi adopted by R-2 and R-3. The respondents have also alleged siphoning off of funds by the petitioner and FIR being filed by other parties for showing his conduct in other proceedings. Respondents have raised a preliminary objection regarding delay in filing of this petition. The matter is pertaining to the acts as early as 1991 and alleged acts of oppression and mismanagement even in the earlier period have been agitated in the petition. This preliminary objection is not tenable as the provisions of the Limitation Act, 1963 do not apply to the proceedings of this quasi-judicial authority which, as per the provisions of Section 10E (5) of the Companies Act, 1956 "shall in the exercise of its powers and the discharge of its functions under the Act or any other law be guided by the principles of natural justice and shall act in its discretion." Of course, latches do apply. But I find none in this case to justify throwing of this petition at the threshold itself. This company petition was filed as early as in 1995.
21. On consideration of the facts and circumstances of this case, I find that both the parties have not come with clean hands. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd (44 CC 390) the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands." Both the petitioners as well as the respondents have not come with clean hands. This petition deserves to be dismissed on this ground alone.
22. Further, I find that the directors of the company have breached the fiduciary duty and have acted against the interest of the R-1 trying to dupe each other and trying to grab the maximum benefits out of the transactions of the R-1 for their proprietorship concerns. Equity prohibits a trustee from making any profit by his management, directly or indirectly. It is objectionable to use such power simply or solely for the benefit of directors or merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. Directors are required to act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. The conduct of the parties has been burdensome, harsh and wrongful. Besides, the affairs of the company have been mismanaged as pointed out above.
23. The fact that the assets of the company have been already been sold off in the year 1993-94 and admittedly it is a company only on paper cannot be ignored while considering petitioners' prayers in this petition which include ordering of investigation into the affairs of the company from its inception till date under Section 235(2) of the Act; removal of R-2 and R-3 from the Board of Directors of the Company; Restraining R-2 and R-3 from interfering or in any other manner participating in the functioning of the respondent company . However, during the arguments a prayer was made that without prejudice to the rights and contentions of the petitioner, the petitioner with a view to amicably resolve the disputes the R-2 and R-3 be directed to return and pay the investment made by the petitioner in the respondent company amounting to Rs. 5,21,000 along with interest @ 15% per annum from the date of investment till the date of payment.
24. As I have held earlier that the petitioner as well as the respondents have not come with clean hands. The petition deserves to be dismissed on this ground alone. Further, it is well settled that the provisions of Sections 397 and 398 which are specifically directed to resolve deadlocks/disputes arising out of company matters cannot be used to resolve any other differences of personal nature between the directors. But even while dismissing a petition under Sections 397 and 398 of the Act, the Company Law Board has power under Section 402 of the Act to pass orders which are just and equitable. Objects and purpose of Sections 397, 398, 402 and 408 of the Act is two fold - to set right the wrongs and take remedial action to prevent occurrence of wrongs in future. Thus both preventive and curative action can be taken by the Company Law Board to regulate the conduct of the Company's affairs in future and to bring to an end the matters complained of. To do substantial justice between the parties, I hereby order that the petitioner be paid value of his shares and allowed to go out of the company, the valuation of shares is to be arrived at as on the date before the sale of the assets of the company by the valuer to be appointed with the consensus of the parties or in the alternative a lumsum amount acceptable to the petitioner may be paid by the respondents to the petitioner with the direction to the petitioner to go out of the company.
25. With the above directions, I dispose of this petition. All CAs stand disposed of. All interim orders stand vacated. No order as to cost.