Company Law Board
Dwija Bandhu Sarkar, Nandita Sarkar And ... vs Dipendra Nath Chakraborty And Cooch ... on 2 December, 2003
Equivalent citations: [2004]53SCL22(CLB)
ORDER
S. Balasubramanian, Chairman
1. In this order, I am considering two petitions -CP No. 20 of 2002 and CP No. 28 of 2003 which were heard together. Both the petitions relate to M/S Cooch Behar Eye Care and Research Centre Private Limited (the company).
2. The petitioners in CP 20 of 2002 filed under Sections 397/398 of the Companies Act, 1956 are respondents in CP 28 of 2003 filed under Section 235(2)(a) of the Companies Act, 1956. The 1st respondent in CP 20 of 2002 is the petitioner in CP 28 of 2003. The company was incorporated in July, 1995. The 1st petitioner in CP 20 of 2002 is an Eye Surgeon and the 2nd petitioner is his wife and the 3rd petitioner who is a doctor is the brother-in-law of the 1st petitioner. They among themselves hold 70000 equity shares of Rs. 10/- each out of 1,10,000 shares being the subscribed and paid up capital of the company, thus constituting 63.67% shares in the company. The balance 40,000 shares are held by the 1st respondent.
3. Arguing for the petitioners in CP 20 of 2002, Shri Mookerjee submitted: The setting of the company to provide eye care facilities was conceived by the 1st petitioner, being a famous eye surgeon. The company had obtained a loan of Rs. 30 lacs from West Bengal Financial Corporation for purchase of medical equipments to be used in the eye treatment center of the company and the 1st petitioner has invested huge funds of his own besides investment in the shares of the company. Since he and the 3rd petitioner being doctors by profession could not attend to the administrative affairs of the company, they associated the 1st respondent, who was a friend of the 3rd petitioner, as a shareholder and a director with the responsibility to look after the administration work. However, in breach of his fiduciary duties and to enrich himself at the cost of the company, the 1st respondent had committed various fraudulent acts. The land owned by the 2nd petitioner was to be transferred in the name of the company for which consideration had been paid to her by the company, but the 1st respondent influenced the 2nd petitioner to execute the deed of conveyance wherein the name of the 1st respondent appeared as a director representing the company. Taking advantage of his name being in the conveyance deed, the 1st respondent wrongfully and illegally caused mutation of this property in his favour as is evident from Annexure P-3 wherein the Municipality has shown the name of the 1st respondent as Assesses for Municipal taxes. Likewise, as is evident from Annexure P-4, he got electricity connection in the premises of the company in his own name. Further, for the medical shop run by the company, he got the license under Drug and Cosmetic Rules 1945 in his own name. For obtaining the said license he had represented himself as the alleged proprietor of the company as is evident from the copy of the License at Annexure P-5. The 1st respondent also attempted to sell the medical equipments in the hospital as is evident from Annexure P-6. He had also misused the General Power of Attorney granted in his favour by the company. When the petitioners came to know of these mis-deeds of the 1st respondent, his general power of attorney was revoked in May, 2000 and in an extraordinary general meeting held on 21.5.2000 which was attended by the 1st respondent, certain decisions were taken to undo all acts of his mismanagement. The said draft resolution and other valuable documents relating to the affairs of the company were kept in the custody of the Tax Consultant of the company. The 1st respondent stole all these documents and he also scored out his signature on the minutes of the EOGM on 20.5.2000 as is evident from Annexure P-9. In view of this, the company filed a complaint with the police and the 1st respondent was arrested and was later on released on bail. In an EOGM held on 22nd July, 2000, after due notice to the 1st respondent, he was removed as a director. Since the continuance of the 1st respondent as a member of the company would be prejudicial to the interest of the company, directions should be given for either forfeiture of 40,000 shares held by the 1st respondent or he should be directed to sell the shares to the petitioners. This will be in line with the various decisions of this Board wherein this Board has directed one of the warring groups to go out of the company. Since the petitioners are majority shareholders, the 1st respondent should be directed to go out of the company.
4. The learned counsel for the respondent submitted: This petition is not maintainable as only minority shareholders are entitled to invoke the provisions of Sections 397/398 of the Act. Further, it is the petitioners who are managing the affairs of the company. The company was not promoted only by the petitioners but also by the 1st respondent who holds 1/3rd of the total paid up capital of the company. The 1st respondent never intended to either appropriate the company's property in his own name or has acted in any manner detrimental to the interest of the company. With a malafide intention, the petitioners convened EOGM on 22.7.2000 to remove the 1st respondent. Even though ho had informed the company by a letter dated 19.7.2000 that he would not be able to attend the meeting on 22.7.2000 due to illness and sought for deferring the meeting, the meeting was held and the resolution to remove the 1st respondent was passed. This resolution is also against the loan agreement with WBFI, according to which no director could be removed without the consent of WBFC. The petitioners have also implicated the 1st respondent on false grounds in a criminal case which was dismissed. Since the 1st Respondent is a shareholder holding 1/3rd paid up capital of the company, he has every right to participate in the affairs of the company. It is the petitioners being majority shareholders, who are guilty of cheating, corruption etc. There have been a number of fake transactions through which the petitioners have misappropriated the funds of the company. They are not calling for general meetings and are denying the rights of the 1st respondent as a shareholder. Therefore, this petition should be dismissed.
5. As far as CP 28 of 2003 is concerned, the learned counsel for the petitioner therein submitted: This petition has been filed under Section 235 (2)(a) of the Companies Act, 1956 seeking for investigation into the affairs of the company as the respondents who are in control and management of the company are guilty of various acts of mismanagement, siphoning of the funds etc. The petitioner was the Managing Director of the company holding 1/3rd of the paid up capital and was a promoter of the company. He was managing the affairs of the company diligently and profitably. However, with a malafide intention, the respondents illegally convened an EOGM on 22.7.2000 and in spite of the petitioners' request for adjourning the said meeting, the respondents removed the petitioner as the director. They also implicated him falsely in criminal cases. The respondents are siphoning of the assets of the company and have conducted the affairs of the company in a manner prejudicial and detrimental to the interest of the petitioner, the company and WBFC. The petitioner has not been provided with a copy of the annual accounts and balance sheets of the company since 31st March, 1999 and he has not been allowed to inspect the records of the company in spite of repeated requests. The petitioners have changed the auditors of the company without complying with the provisions of the Act. By manipulating the accounts, the respondents have swindled Rs. 36 lacs and are guilty of preparation of fake documents of sale and purchase and guilty of opening bank accounts without the knowledge of the petitioner who was the Managing Director. In the balance sheet for the year 1998-99 the respondents have shown that an amount of Rs. 5,19,600 had been paid towards unsecured loans which was not actually paid but was pocketed by them. Huge liabilities have been created without justification. The petitioners are guilty of fraud, misfeasance etc. In the winding up petition filed by the petitioner before the Calcutta High Court, he has sought for appointment of a provisional liquidator under Section 450 of the Companies Act, 1956. In view of the mismanagement in the affairs of the company, this Bench should direct an investigation into the affairs of the company.
6. Shri Mookherjee, Sr. Advocatc for the respondent submitted: The petitioner has not made out any case for ordering an investigation. This petition has been filed as a counter blast to CP 20 of 2002 filed by the respondents. The petitioner is not interested in the affairs of the company and that is why he filed a winding up petition before the Calcutta High Court. The conduct of the petitioner has been elaborated in CP 20 of 2002. Presently, the company has repaid the entire loan to WBIC, which would not have been possible if there was any diversion or misappropriation of funds of the company by the respondents. Since the petition is devoid of any merit, the same should be dismissed.
7. I have considered the pleadings and arguments of the counsel. As far as CP 28 of 2003 is concerned, most of the allegations relate to the removal of the petitioner as a director. In respect of his complaints of siphoning of funds by the respondent etc., they are all based on the balance sheet figures. An order of investigation is not made on suspicion and surmises. There should be proper material to form an opinion that the affairs of the company need to be investigated. The petitioner has not furnished sufficient particulars to enable me to form an opinion that the affairs of the company need to be investigated. From the sequence of events, it is apparent, as submitted by Shri Mukherjee, that this petition is a counter blast to CP 20 of 2002. As a matter of fact, I find that the contents of this petition are similar to the reply filed by the petitioner in CP 20 of 2002. Therefore, as far as this petition is concerned, the same deserves to be dismissed for want of sufficient particulars/materials and accordingly I do so.
8. As far as CP 20 of 2002 is concerned, the respondent has questioned the maintainability of the petition on the ground that the provisions of Sections 397/398 can be invoked only by minority shareholders and not by majority shareholders. There is nothing in either in Section 397 or 397 to stipulate so. As long as the petitioners meet with the requirements of Section 399, they could file a petition under Sections 397/98. In the present case, the petitioners satisfy the requirements of Section 399 and as such this petition is maintainable. The main allegations of the petitioners are that the 1st respondent has appropriated to himself the property of the company by getting the documents mutated in his favour and that the Drug license and the electricity connection were taken in his name etc. They have substantiated these allegations by documentary evidence. In the reply, the 1st respondent has not touched upon any of the documents other than denying the allegations. This would indicate that the allegations of the petitioners are based on facts. It is a settled principle of law that no director can act in breach of his fiduciary duties and that he cannot enrich himself at the cost of the company. Even though the 1st respondent has questioned his removal as a director on procedural grounds, yet, when his removal is on account of his breach of fiduciary duties, his removal cannot be challenged. The issue for consideration is, when the majority shareholders have already removed him as a director, whether they are entitled to seek that either his shares should be forfeited or he should be directed to sell his shares.
9. It is an admitted fact that there are only two groups of shareholders, namely the petitioners' group holding 63.67% shares and the respondent holds the balance shares. The relationship between the two groups is so strained that the petitioners have filed a criminal case against the 1st respondent and the 1st respondent has filed a winding up petition and CP 28 of 2003 seeking for investigation. Thus, it is apparent that both the groups cannot continue together in the company. The provisions of Sections 397/398 are alternative to a winding up petition and therefore, one of the most important aspects to be considered in granting relief is that the survival of the company is ensured by protecting its interests. When there are two warring groups in a company, it is in the interest of the company that one of the groups should be directed to go out of the company on receipt of proper consideration for its interest in the company. Since, in the present case, the company is providing eye care facilities and the 1st petitioner is an eye surgeon and 3rd petitioner is a doctor, it is they who should control and manage the affairs of the company. Further, being promoters of the company, they also hold majority shares.
From the winding up proceedings I find that an option was given to the 1st respondent to go out of the company either on accepting par value for his shares or getting the consideration as per the valuation to be made. It appears that the 1st respondent has rejected both the offers and is keen of getting the company wound up. This would mean that while the petitioners holding majority shares desire to carry on the business of the company, the 1st respondent desires to have the company wound up. Therefore, I consider that in the interest of the company, the 1st respondent should go out of the company so that the petitioners could carry on the business of the company without any hindrance. The petitioners have sought for forfeiture of the shares of the 1st respondent or in the alternative, direct him to sell his shares. The petitioners have not cited any precedence either of this Board or any other Court forfeiting the shares of a shareholder in a proceeding under Sections 397/398. Therefore, it is in the in the interest of the survival of the company that the 1st respondent goes out of the company and I accordingly direct the 1st respondent to sell his shares to the petitioners. As far as the consideration for the shares is concerned, the legally accepted principle is that the shares are valued on the basis of the financial position of the company as on the date of filing the petition. But in the present case, in view of the financial position of the company, the fair value of the shares would not be even Rs. 10 per share, being the par value. The petitioners have not alleged any financial mismanagement on the part of the 1st respondent. Therefore, I am of the view that the 1st respondent holding 1/3rd of the share capital cannot be bound by the fair value for the shares. Since his investment has been beneficially utilized by the company, he should be entitled to get reasonable return on his investment. I find from the petition that when he joined the company, he was unemployed. Since he was in charge of the administrative work in the company, I presume, in the absence of any details to the contrary either in the petition or in the counter in this regard, that he was getting some remuneration as long as he was a director, which, in a way could be considered to be a sort of return for his investment. Since he was removed as a director in July 2000, he would not have drawn any remuneration afterwards. Even though his removal as a director was on account of his own conduct, purely on equitable grounds, I am of the view that he should get a token interest at the rate of 6% from July 2000 till his investment of Rs 4 lakhs is returned to him. Accordingly, I direct the petitioners/the company to purchase his shares at par with 6% simple interest per annum from July 2000, till the consideration for the shares is paid to him. The consideration for the shares should be paid by a demand draft drawn in the name of the 1st respondent by 31st December 2003. In case the company purchases the shares, it is authorized to reduce the capital of the company to the extent of the paid up value of the shares. In case the petitioners purchase the shares, the company is authorized to rectify the Register of Members by deleting the name of the 1st respondent there from and entering the names of the petitioners purchasing the shares. In case, share certificates in respect of these shares have been issued, the same shall be cancelled and fresh share certificates will be issued by the company in the name of the purchasers of the shares.
10. The petition is disposed of in the above terms.
S. Balasubramanian