Company Law Board
J.C. Augustine vs Remanika Silks (P.) Ltd. on 21 November, 2000
ORDER
Balasubramanian, Vice-Chairman
1. In this petition filed under section 397/398 of the Companies Act, 1956 ('the Act'), the petitioners collectively holding 35 per cent shares in Remanika Silks (P.) Ltd. (the company) have challenged the removal of the 1st petitioner as a director/managing director and also the appointment of the 2nd respondent as the managing director.
2. The facts of the case are that the petitioners were running a partnership firm under the name and style of Remanika Silks. In the year 1993, this company was incorporated to take over, as a going concern, the business of the partnership along with its assets and liabilities. The signatories to the memorandum were the petitioners and the 2nd and 3rd respondents. In addition to these 4 persons, the wife of the 2nd respondent was also a shareholder. Later, the 4th respondent and his family members were also admitted as shareholders. The shareholding position was that the petitioners' family held 35 per cent, 2nd respondent's family 30 per cent, 3rd respondent 10 per cent and the 5th respondent 25 per cent. The 1st petitioner was one of the first directors as also the managing director by virtue of articles 29 and 43 of the articles of association of the company. In an EOGM held on 30-1-1997, the 1st petitioner was removed as a director and the managing director and in the same meeting the 2nd respondent was appointed as a director and managing director. The removal as well as appointment have been challenged in this petition.
3. Shri Ramesh Babu, the Advocate appearing for the petitioners submitted as follows: This company was incorporated with a view to expand the business of the erstwhile partnership of which the petitioners were the partners and with a view to have a controlling say in the company, it was provided in the articles that the 1st petitioner would be the first managing director. One of the arrangements with the promoter respondents was that the petitioners would have 35 percent shares in the company and that the 2nd respondent would pay a substantial amount of money to the petitioners by way of goodwill which has also been indicated in the Memorandum. The 2nd respondent who was appointed as Director (Finance) was removed from that position on account of various prejudicial acts committed by him in the affairs of the company in May, 1995. In view of this, with the help of the 3rd, 4th and 5th respondents, he has taken over the control of the company in an illegally convened EOGM on 30-1-1997 by removing the 1st petitioner as a director/the managing director, and getting himself appointed as the managing director. The company received a requisition dated 21-12-1996 from the 2nd and 3rd respondents seeking for convening an annual general body meeting on the ground that no AGM of the company had been held till then. In the same notice there was also a proposal for removal of the 1st petitioner as the Managing Director and as a Director. The 1st petitioner being the Managing Director sent a reply stating that the AGM of the company had been held in accordance with law and he also referred to various documents filed with the Registrar of Companies in regard to the AGM. Therefore, as far as this requisition is concerned, no further action needed to be taken. However, the auditor of the company received a notice dated 22-1-1997 staling that an EOGM of the company would be held on 30-1-1997 and this intimation had been signed by the 3rd and 4th respondents. This intimation purportedly under section 169 of the Act was not received by the petitioners. The only agenda as per the notice was to remove the petitioner as the managing director and as a director. In the EOGM, not only the petitioner was removed as the managing director/a director, 4 new directors were appointed as directors and the 2nd respondent was also appointed as the managing director. The convening, holding and the business transacted in that meeting are all illegal and void in view of violation of the provisions of the Act. As per section 169, a requisitionist has to give a notice to the company for convening an EOGM specifically indicating the business to be transacted at the meeting. In case the company does not act on that notice within 21 days, then, the requisitionists themselves could convene the meeting within 45 days of lodgement of the notice. Here in the present case, there is no evidence that anybody requisitioned that meeting under section 169 other than the one for calling for convening an annual general body meeting. Further, there is nothing on record to show that the Board of Directors of the company had considered any such notice. The notice received by the auditors of the company had been signed by two persons purportedly as directors and the notice has not been issued in the name of the company. Further, for removal of a director, a notice under section 284 should have been given to the directors while no such notice was issued in the present case. Further, a special notice in terms of section 284 should have been given to the first petitioner. Therefore, not only the holding of the meeting is in violation of section 169, the removal also is in violation of section 284. Further, in the same meeting the 2nd respondent was appointed as the managing director without this item being on the agenda of the notice of the alleged requisition. Transacting a business in a requisitioned EOGM without the same being included in the notice of the requisition is against the provisions of section 169. Therefore, all the proceedings of EOGM should be declared as null and void and the 1st petitioner should be declared to be continuing as the managing director. He submitted that the petitioners challenged the legality and validity of the EOGM before the sub-court and also sought for ad interim injunction against the holding of the EOGM which was not granted. Finally, the said suit was withdrawn. Later, during the pendency of the proceedings before the CLB, the petitioners filed a winding up petition before Kerala High Court in terms of section 433(e) and (f) since the 2nd respondent has, by misappropriation and mismanagement brought the company to a state resulting in the company's inability to pay its creditors.
4. Shri Santosh Paul, the Advocate for the respondents submitted as follows :
The petitioners have already filed a winding up petition and the same has been admitted by the Kerala High Court and has also been advertised. This fact has deliberately been concealed by the petitioners. Relief under section 397 is granted only on the basis that winding up of the company would unfairly prejudice the members. Since, petitioners themselves have filed the winding up petition, they can no longer seek the alternative remedy under section 397 and as such the petition deserves to be dismissed. As far as the EOGM is concerned, the petitioner had already challenged the same in the civil court wherein he could not get any relief. Since the 1st petitioner as the managing director was mismanaging the affairs of the company, 2 shareholders sent a requisition dated 21-12-1996 requisitioning an EOGM to remove the 1st petitioner as a director/the managing director. This requisition was considered by the Board in a meeting on 31-12-1996 and the Board decided to convene the EOGM, on 20-1 -1997. Due notice of this meeting was given to the petitioners.
The very fact that the petitioners challenged the convening of the meeting in the civil court would show that they had received the notice for the meeting. Even though the petitioner attended the meeting, he did not participate in the discussion. In that meeting, the resolution relating to the removal of the petitioner as director/managing director was carried through. In the same meeting, the shareholders desired the appointment of the 2nd respondent as a director/the managing director and accordingly a resolution to that effect was moved and carried through. Therefore, there is no violation of the provisions of the Act cither in the removal of the petitioner and the appointment of the 2nd respondent as a director/ managing director.
5. The learned counsel for the respondents further submitted that a single act alone cannot constitute oppression or mismanagement and if the action of the directors is invalid, then, a proper remedy would be to move the civil court and not the CLB under section 397/398 (Suresh Kumar Sanghi v. Supreme Motors Ltd. [1983] 54 Comp. Cas. 235).
On the same proposition, he cited a few other cases also.
6. We have considered the pleadings and arguments of the counsel. The main grievance of the petitioner relates to his removal as a director/ managing director. Normally, in section 397/398 petition, directorial complaints are not entertained save in certain circumstances like the family company in the garb of a quasi-partnership etc. In the present case, the company has taken over the business of a partnership firm with the petitioners as the only partners. In the articles of association of the company, the 1st petitioner is shown to be the managing director and the petitioners collectively held 35 per cent shares in the company. Therefore, in facts of this case, the grievance relating to the removal of the 1st petitioner as a director/managing director could be entertained in this petition.
7. The complaint of the petitioners is that the notice convening the EOGM was not received by them and that the provisions of section 169 had not been complied with and that the 1 st petitioner was not given special notice in terms of section 284. According to the 1st petitioner, when he was the managing-director, he received two requisitions for convening an annual general body meeting and no notice in terms of section 169 had been received by the company. According to the respondents, in addition to the above two notices, the company had received two other notices in terms of section 169. Copies of these two notices have been annexed in the reply. We have seen all the four notices. 2 shareholders, namely Shri P.S. Mohan Kumar and Ms. Ranganayhai have individually singed these two sets of notices. In the notices on seeking convening an annual general body meeting, they have also sought for removal of the petitioner as a director/ the managing director as a special business. In the notice under section 169, they have sought for his removal. Both sets of notices are found to have been dated 21-12-1996. We fait to understand as to why these shareholders should have issued two sets of notices on the same day - one for AGM and another for EOGM to transact the same business. Since the respondents themselves admit about the notices relating to the Annual General Body Meeting, it is doubtful whether the same shareholders could have sent another requisition for an EOGM on the same day of sending the requisition for an annual general meeting, both seeking to transact the same business of removal of the petitioner as a director/ managing director. As far the notice convening the EOGM is concerned, we find that the notice is dated 22-1-1997 (Annexure A-5) and it is stated to be from one Shri Baldev R. Tadri and one Shri Mathew Vellapally and that has been signed by both of them as directors. A copy of this has also been addressed to the company. The notice reads as follows:
"Extraordinary General Meeting notice U/S 169 of the companies Act to all the shareholders of the Company :
Please refer our letter regarding the EGM Lt., dated 1-1-1997. In this connection it is hereby confirmed that the above EGM will beheld at Abad Plaza at 11 A.M. on 30-1-1997. You are also asked to please bring the minutes book and all the account books and other necessary/relevant records for the perusal of the Board of Directors and the all shareholders of the company. The Auditors and the Accountant Officer of the company is also hereby asked to be present to explain various matter arising during the abovesaid meeting. Thanking you.
Yours faithfully, Sd/-
Mathew Vellapally Director Baldev K. Dardi Director."
8. A perusal of the notice would show that this notice has not been issued in the name of the company and then it does not indicate that it has been requisitioned by certain shareholders. Further, it also does not indicate the business to be transacted in the meeting nor it indicates that the notice of requisition received by the company has been enclosed therewith. Further from the requisition notice, we do not find any indication that a special notice in terms of section 284 has been given to the company. The company has also not established that in terms of section 284, whether any opportunity was given to the 1st petitioner to represent against his removal. Thus, we find that the notice convening the EOGM suffers from various legal infirmities. The learned counsel for the petitioner argued that for want of explanatory statement in terms of section 173 also, the notice convening the EOGM should be declared as invalid. However, such an Explanatory Statement is not necessary in case of an EOGM requisitioned by the shareholders. (Life Insurance Corpn. of India v. Escorts Ltd.
[1986] 59 Comp. Cas. 548). In view of the notice convening the meeting being invalid, all the business transacted in that meeting will have to be declared as invalid. Further, in that meeting, the 2nd respondent was appointed as a director/the managing director along with 4 other directors. The settled position of law is that in a meeting requisitioned by shareholders, only those businesses for which notices of requisition had been given could be transacted and no other business. It is clear from the provisions of section 169(5) which stipulates that when two or more distinct matters are specified in the requisition, the provisions of subsection (4) would apply separately in regard to each such matter. Therefore, the appointment of the 2nd respondent and 4 other directors has no validity.
9. As we have indicated earlier, the only allegation in this petition relates to the removal of the petitioner as a director/managing director and the appointment of the 2nd respondent as a director/managing director. We have held in the previous paragraph that both the acts of this company are invalid and the consequence would be that the petitioner would regain the position of the managing director and that the 2nd respondent and other directors appointed in that EOGM would cease to be directors. However, we are not giving any directions as the same would not be in the interest of the company or the shareholders for various reasons. One is that the petitioners hold only 33 per cent shares and the respondents controlling balance 67 per cent shares can always remove the petitioner as a director. That being the case, our putting the petitioner back on the Board could be only for a short period. Secondly, the 2nd respondent has already got his appointment as the MD ratified in a subsequent general body meeting. Thirdly, the petitioners have already filed a winding up petition before the Kerala High Court which has also been advertised. Further, we note that when the partnership firm in which the petitioners were partners was converted into a company, out of mutual trust and confidence, they had allowed the respondents to have 65% per cent shares and this mutual trust and confidence no longer exist. Under these circumstances, any direction by us consequent to our findings on the allegation would only escalate further disputes between the parties and therefore we arc not giving any directions. However, with a view to put an end to further disputes between the parties, we give the option to the petitioners to sell their shares in the company to the respondents for a fair price to be determined by the statutory auditors of the company as per the balance sheet as at 31-3-1997, being the proximate date to the filing of the petition. In case they exercise their option, they should give a notice to the company/2nd respondent latest by 31-12-2000. Once such a notice is received by the company/2nd respondent, then the notice will be binding on them. The company should proceed with the determination of the fair price for the shares within a month thereafter and the 2nd respondent will be bound to purchase the shares of the petitioners at the value so determined within a month thereafter.
10. With the above directions, we dispose of this petition. No order as to cost.