Company Law Board
Shri Anil Gupta vs Mirai Auto Industries Private Limited ... on 26 August, 2002
ORDER
S. Balasubramanian
1. In this petition filed under Sections 397/398 of the Companies Act, 1956 (the Act) alleging acts of oppression and mismanagement in the affairs of M/S Mirai Auto Industries Private Limited (the company) the main allegations are that the company has terminated sole agency given favour of a firm of the petitioners, that no notices for General Body Meetings had been issued to the petitioners, that the respondents had not filed due returns with the Registrar of Companies, that there have been heavy borrowing by the company disproportionate to its net worth etc. On the basis of these allegations, the petitioner has sought for various reliefs inter alia including declaration that the letter of termination the sole agency agreement be declared as null and void.
2. Shri Kumar, Sr. Advocate appearing for the petitioner submitted: The petitioner and his group hold 40% shares in the company. The 2nd respondent invited the petitioner to join the company with a view to utilize the latter's expertise in the marketing of auto products. A shareholders' agreement was entered into between the petitioner and the 2nd respondent providing for various safeguards to the interest of the shareholders. Presently, there are only two groups of shareholders in the company-petitioner's group holding 40% and the respondents' group holding 60%. In addition to the shareholders' agreement, the company entered into a sole selling agreement with M/S Swadesh Automobiles, a partnership firm of the petitioner by which the company undertook to sell its entire production through Swadesh Automobiles. The agreement further provided that if the company were to sell its products other than through Swadesh Automobiles, the company shall pay 10% overriding commission on such sales to Swadesh Automobiles. All of a sudden, the company terminated the said agreement by a notice dated 11.11.2000 (Annexure-F). This act of the company is grave act of oppression against the petitioner shareholder as Swadesh Automobiles was his partnership firm. Further, the company has also sold directly to various customers on which the overriding 10% commission has not been paid to Swadesh Automobiles. Right from the time the petitioner became a shareholder, he has been kept in dark about the affairs of the company. No notice for any general body meeting was issued to him and he has been unaware of the financial position of the company till this Bench directed the Bench Officer to authenticate the various records of the company. A perusal of the Balance Sheet made available to the petitioner during the proceedings show that the financial management of the company has been in a bad shape indicating diversion of funds of the company by the respondent directors. A substantial sum of money-nearly 40% of the turnover of the company-is shown to be due from M/s Harish Kumar & Co. and Shivam Enterprises and the whereabouts of these entities are not known. There is nothing on record to show that the company has taken any steps to recover the amount and as a matter of fact no amount could be recoverable since no such party exists. It is obvious that the alleged dues from them are nothing but bogus entries to hide diversion of the production of the company by the 2nd respondent. A comparison of the consumption of raw materials and usage of power with the production recorded would indicate that all the production are not brought into account evidencing diversion of the production by the respondents. Even in case of outstanding from customers, no confirmation has been received as is evident from the auditors' report. Therefore, a special audit of the accounts of the company should be ordered by this Bench.
3. Shri Kailash Vasdev, Sr. Advocate for the respondents submitted:
This petition is a motivated one filed for an ulterior purpose of reviving the sole selling agreement. After filing of this petition, the petitioner moved the High Court for appointment of an Arbitrator in terms of the sole selling agency agreement and as such the petitioner cannot agitate this issue before this Bench. Even otherwise, since matters relating to sole selling agency is beyond the scope of a 397/398 petition which is confined only to the interest of a person in his capacity as a member. As a matter of fact the Arbitrator appointed by the High Court has held that the company has rightly terminated the agreement (Annexure C-2). Further, the petitioner has started his own manufacturing facility to produce similar products as that of the company and has been marketing the same in competition with the company and therefore he is not entitled for any equitable relief.
4. The learned counsel further submitted: Since the company was marketing its entire products through the firm of the petitioner, he was practically having substantial financial control over the affairs of the company. His firm owes more than Rs. 32 lacs to the company even today and in the arbitration proceedings, the company has made a claim of over Rs. 70 lacs against that firm. In other words, by not releasing the dues to the company, it is the petitioner who has been oppressing the majority shareholders. As far as the allegation of the petitioner that M/s Harish Kumar & Co and Shivram Enterprises are unknown and non entities is concerned, these parties were the trade nominees of the petitioner himself as the company was not directly dealing with any customers. It is evident from the invoices signed by the petitioner himself at Page 12 and 15 of the affidavit of the respondents dated 30.7.2002, for the consignments sent to these entities. Further, these dues from these entities have been going on right from 1996 as is evident from the relevant Balance Sheets and the under the head of "List of Sundry Debtors". As far as other allegations relating to notices for the general body meetings are concerned, the company has been sending notices but the petitioner never chose to attend the meetings.
5. Summing up his arguments, the learned counsel submitted that this petition is an abuse of process of law and therefore deserves to be dismissed. However, to buy peace, the respondents are prepared to by the shares of the petitioner and his group for a fair valuation to be determined by an independent valuer.
6. Shri Kumar submitted in rejoinder that it is wrong to say that the petitioner has received notices for the general body meetings and that he chose not to attend the same. The fact is that no notice for any of the general body meetings had been received by the petitioner. The two entities were not introduced by the petitioner and that at no point of time the company had complained to the petitioner about the non payment of the dues from these entities for the reason that the petitioner had no concern with these entities. Just on the basis of two invoices signed by the petitioner for the consignments sent to these entities, the respondents cannot claim that these entities were the nominees of the petitioner. The petitioner started his own business only after the company terminated the sole selling agency and therefore it could not have been a ground for termination of the agreement. The real purpose behind the termination was that in view of the efforts of M/S Swadesh Automobiles, the sale of the products of the company was picking up and therefore the respondents decided to reap of the benefits by themselves by terminating the agreement. Since the petitioner holds 40% shares in the company, he is entitled to know the status of affairs of the company including its financial position. In view of the various deficiencies pointed out in regard to the annual accounts of the company, unless and until a special audit is carried out, the petitioner is not interested in selling his shares on the basis of the balance sheet prepared by the respondents.
7. We have considered the pleadings and arguments of the counsel. As far as his allegation in relation to the termination of the agreement is concerned, we do not propose to deal with the same for two reasons. One is that in a Sections 397/398 petition, the rights and interest as a member of a company can alone be agitated and not in relation to any commercial relation that a member has with the company as held by this Bench in M.K. Thukral v. Krone Communications Limited (86 CC 645-CLB). The second reason is that the arbitrator appointed by the High Court is already seized of the disputes relating to that agreement. Once we leave out this allegation, we do not find any other substantial allegation in the petition except the one relating to the outstandings from certain entities. While, the petitioner asserts that these entities are non existent, the respondents have given the details of the sales tax number etc. of these entitles. Further, we also note that certain dues from these entities are shown to be due in the balance sheets for many years. We are unable to appreciate the stand of the petitioner who has signed the consignment invoice-even if it is only one for each entity now alleging that these entities are non existent. Therefore as far as this allegation is concerned, noting that over a sum of Rs. 40 lakhs is outstanding from these entities, we only direct the company to take expeditious steps to recover the dues from these entities, if necessary, by instituting appropriate legal proceedings.
8. As far as the prayer for conducing a special audit is concerned, the petitioner has doubted the genuineness of the entries relating to figures of production, outstanding from debtors etc. In the absence of full particulars based on which the petitioner has got these doubts, we do not consider it appropriate to order a special audit.
9. On an overall assessment of the allegations, we get a distinct feeling that this petition as an off shoot of the termination of the sole selling agency. Further, we are not in a position to appreciate the stand of the petitioner that he, having 40% shares in the company, would have kept quite about the affairs of he company especially when we note that he acquired 40% shares in the company installment over a period of 3 years without enquiring into the affairs of the company. Therefore we conclude that this petition is not a bonafide one and has been filed with an ulterior purpose and as such the petition deserves to be dismissed. However, since the respondents being in majority have expressed their desire to purchase the shares of the petitioner, we give him the option to sell his shares to the respondents on a fair valuation to be made by the statutory auditors of the company on the basis of the balance sheet as on 31st March, 2001 being the proximate date of the petition. In case he elect this option, he must inform the respondents by 30th September, 2002. In that case, the statutory auditors will complete the valuation of the shares on the basis of the balance sheet as on 31st March, 2001, latest by 15.11.2002 and the value so determined shall be binding on both the parties. The total consideration for the shares held by the petitioner will be paid either by the company or by the respondents before 31st December, 2002. In case the company purchases the shares, it is authorized to reduce its share capital to the extent of the face value of the shares. In case, the petitioner does not elect this option, since he will continue as a member of the company, we direct the company to issue notices for members meetings by registered post along with agenda atleast 21 days prior to the dates of the meetings.
10. The petition is disposed of in the above terms. No order as to cost.