Company Law Board
Puneet Goel vs Khelgaon Resorts Limited on 17 April, 2000
ORDER
S. Balasubramanian, Vice-Chairman
1. The petitioners claiming to hold 40 shares out of 70 shares issued by Khelgaon Resorts Ltd. ('the company') have filed this peti- tion under Sections 397 and 398 of the Companies Act, 1956 ('the Act') alleging acts of oppression and mismanagement in the affairs of the company. The main allegations made in the petition relate to the removal of the 1st and the 2nd petitioners as dire- ctors of the company, issued of further 180 shares in the company and siphoning off funds of the company by the respondents.
2. Shri Mathur, Advocate, appearing for the petitioners submitted that this com- pany was incorporated in April, 1997, with 7 shareholders - four from the petitioners group and three from respondents group with 10 shares each. The petitioners' group thus held 40 shares while the respondents' group held 30 shares. The 1st and 2nd peti- tioners as also the 2nd respondent were the first directors of the company. Thus, the petitioners' group held majority shares as well as majority on the Board of the com- pany. It was mutually agreed that the 2nd respondent would be the Chairman while the 2nd petitioner would be the managing director. In addition to the investment in the shares, the petitioners invested Rs. 50.41 lakhs by way of unsecured loans and also for payment to parties and towards expenses of the company. However, the respon- dents did not invest any further funds. The 2nd respondent was in charge of adminis- tration and financial matters while the 2nd petitioner engaged himself in exploring the possibilities to start building up of resorts. Right from the incorporation, no board meetings or general body meetings were convened by the 2nd respondent. However, through a public notice in Statesman dated 21.8.1998, the company had notified that the 2nd petitioner was removed as a director in a Board meeting held on 25.7.1998 and by another publication in Sunday Pioneer dated 20.9.1998, it was notified that both the 1st and 2nd petitioners had been removed as directors in a board meeting held on 25.7.1998. It later transpired that the petitioner-directors were declared to have vacated the office of directors in terms of Section 283(1)(g) of the Act. Shri Mathur submitted that the petitioner-directors did not receive any notice for any board meeting, and as such (that) they had not attended 3 consecutive board meetings did not arise. Referr- ing to the rejoinder filed after carrying out inspection of the records of the company as per the orders of the Company Law Board dated 5.2.1999, Shri Mathur pointed out that there are many inconsistencies in the records of the company. He pointed out that, in some of the meetings, even though the petitioner-directors were shown to have been present, yet, their signatures in the attendance register maintained by the com- pany are missing. This itself, he contended, would prove that their attendance shown in the minutes of the meetings is fabricated. He contended that the petitioner-direc- tors, being the largest contributors to the company, would not have absented from the Board meetings if proper notices had been received by them. He also pointed out that the respondents have not produced any evidence of having sent the notices for the alleged meetings. Further, he contended that, while as per the public notice the peti- tioner-directors had been removed, now it is contended by the respondents that the petitioner-directors had ceased to be directors by operation of law. According to him, the respondents were not comfortable with the petitioner-directors since they had asked the 2nd respondent to account for the money invested by the petitioners. He also submitted that the petitioners were never aware that 180 additional shares were allotted on 15.9.1997 to the respondents and the petitioners came to know about this allotment only from the replies filed by he respondents and after inspection of the records of the company. He submitted that the allotment of 180 shares was mala fide and had been done only with a view to reduce the majority of the petitioners from 57% to 16%. He further submitted that the respondents are guilty of not having complied with the directions of the Bench to give complete inspection of all the records of the company.
3. Summing up his arguments, Shri Mathur submitted that the company is a family company with close relations as the shareholders and that at the time of incorpora- tion of the company, it was envisaged that the company would be run on partnership principles with the petitioners having majority shareholding as well as majority on the Board. By issue of further shares and removal of the petitioner-director, the respon- dents have acted in a manner oppressive to the petitioners and as such sought for de- claring that the petitioner-directors continue as such and for setting aside the allot- ment of 180 shares. He also prayed that the respondent Nos. 2 to 4 be removed as directors and all the transactions of the company from 20.5.1998 be declared as null and void.
4. Shri Manoj Singh, Advocate, for the respondents, submitted that the allegations of the petitioners are baseless. He submitted that the company has been regular in holding Board meetings and notices were issued to all the directors and the petitioner- directors had attended many board meetings as is evident from the copies of the minutes filed. He pointed out that the petitioner-directors had misused their position as directors and have collected a large amount of money from intending investors and had pocketed the same without accounting for the same in the books of account of the company. Since the respondents questioned their conduct, they stopped attending the board meeting in spite of notice. He also submitted that all the records of the com- pany like minutes book, attendance sheets etc., had been taken away by the petitioner- directors and, therefore, the respondents had to reconstruct all these documents with the available material. He further submitted that there was never an understanding that the company would be conducted in the form of a quasi-partnership. He submit- ted that the petitioner-directors ceased to be directors only by operation of law and not on account of any overt act by the respondents. Dealing with the notices published, he pointed out that in the notice published in the Statesman, the name of the 2nd peti- tioner had been inadvertently omitted, and therefore, to rectify the same, the second notice in Sunday Pioneer was published. Therefore, he submitted that the cessation of office by the petitioner-directors by their own conduct cannot amount to an act of oppression.
5. In regard to allotment of 180 shares on 15.10.1997, he pointed out that this allot- ment was made in a board meeting held on that date which was attended by both the petitioner-directors. In that meeting, 3 more directors were appointed and since these 3 directors had made applications for allotment of shares, 180 shares were allotted with the consent of the petitioner-directors. Therefore, he submitted that having agreed for allotment of shares in the board meeting, the petitioners cannot now allege that such allotment amounts to an act of oppression.
6. Summing up his arguments, Shri Manoj Singh submitted that the petitioners have not invested Rs. 50.4 lakhs as claimed by them. According to him, the peti- tioners had collected money in the name of the company and without accounting for the same in full, claim that whatever they have accounted for in their own invest- ment. He also pointed out that the second petitioner is facing criminal charges in the court of Metropolitan Magistrate Court, Delhi, and such is not a desirable person to be continued as a director.
7. We have considered the pleadings and arguments of the counsel. Along with the petition, an application CA 29 of 1999 was also filed seeking for directions to the respondents to give inspection of the statutory records of the company. On 5.2.1999, an order was passed directing the respondents to give inspection of the statutory records of the company and also furnish to the petitioners a monthly statement of receipts and payments of the company. In the hearing held on 12.5.1999, further direc- tions were issued to the respondents to file a statement of a consolidated receipts and payment account of the company from its date of incorporation till 1.5.1999 along with sur-rejoinder. Since the petitioners had claimed that they had advanced a large amount of funds to the company, the respondents were directed to indicate as to how these amounts were reflected in the books of the company and the petitioners were directed to file, in a sealed cover, the sources of these funds. In the hearing held on 6.12.1999 and 13.12.1999, the respondents were not represented and, accordingly, the matter was finally held on 5.1.2000.
8. Before dealing with the allegations, it is appropriate to examine the authenticity of the Board minutes as it would have bearing on the two issues raised by the peti- tioners - their removal as directors as well as allotment of shares. They reply filed by the respondents is found to be very sketchy without full particulars and supporting documents. On our directions, inspection of documents was given to the petitioners who later on filed copies of the Board minutes and attendance slips. As per these minutes, Board meetings were held on 21.4.1997, 13.6.1997, 15.9.1997, 11.10.1997, 2.12.1997, 31.3.1998, 26.6.98 and 25.7.1998. Copies of related attendance slips for these meeting were also produced. As per the minutes of the board meeting on 15.9.1997, three new directors were appointed as additional directors and 180 shares at 80, 80 and 20 were allotted to these directors. The minutes record the presence of the peti- tioner-directors while the attendance slip for that meeting does not bear their signa- tures. It is also noted that the attendance slips for the meetings on 21.4.1997 and 13.6.1997 bear the signatures of the additional directors, even though they were appointed later on 15.9.1997. Thus, they could not have signed the attendance slips for the meetings held before their appointed as additional directors. The respondents have taken a stand that the attendance slips for the meetings earlier to the one held on 2.12.1997 had been taken away by the petitioners and as such, the attendance slips were reconstructed. They also rely on the minutes of the Board meeting held on 2.12.1997 in which this fact is found to have been recorded. We find that the respon- dents had caused a lawyer's notice to be issued to the petitioner dated 18.9.1998 asking them to return many records, cheque books, etc., but there is no mention about the attendance slips. Likewise, when it was recorded in the minutes of the meeting on 2.12.1997, that the petitioners had taken away the attendance slips, nothing has been recorded about other documents including cheque books. The Board should be more concerned about cheque books, and not the attendance slips. Further we note that as seen from the minutes that other than recording the absence of the petitioners and that they had taken away the attendance register, no other business was transacted in that meeting. All these aspects make us to conclude that the allegations of the peti- tioners that 180 shares were allotted behind their back in a Board meeting held with- out notice to them stand substantiated. Further, in the absence of the petitioner-direc- tors, there would have been no quorum on 15.9.1997 to transact any business. In this meeting - 3 additional directors were appointed and 180 shares were issued. Fur- ther, the respondents have not furnished any justification for issue of further shares. Thus, the allegation of the petitioners that the minutes had been fabricated to show further shares were issued only to convert the petitioners into minority - stands sub- stantiated. Conversion of a majority into minority is a grave act of oppression. Accor- dingly, we hold that the allotment made in a meeting without notice to the petitioner directors, without proper quorum, resulting in conversion of the majority into minority has to be declared as null and void and we do so.
9. That next issue relates to the alleged vacation of office by the petitioner-direc- tors. According to the respondents, the petitioner-directors did not attend 3 consecu- tive meeting on 2.12.1997, 31.3.1998 and 26.6.1998. In view of this, in the meeting on 26.6.1998, it was decided to issue a letter calling for their explanation for their absence, and accordingly, a letter was issued to them on 28.6.1998. Since they did not respond to this letter, in the Board meeting held on 25.7.1998, they were declared to have vaca- ted their office as directors in terms of Section 283(1)(g). No materials have been placed before us to establish that notices were issued to these directors for these meetings. Further, we also note that in the newspaper advertisements, it was notified that they had been removed from office and not that they had vacated their office by operation of law. Even though the respondents assert that by their own conduct, the petitioners have ceased to be directors, in para 1.4 of the sur-rejoinder they have averred, which was also pointed [out] by their counsel, 'respondents further state that removal of the petitioners was in the interest and welfare of the company because during this period the petitioner was running away from the court of Metropolitan Magistrate....It is reiterated again that in view of the aforestated facts and circumstances, removal of the petitioner is legal as per the law and in the larger interest of the respondent No. 1.' This averment, along with the absence of any materials to show that notices for the meetings had been issued to the petitioner-directors, lead us to form an opinion that the respondents who had decided to get rid of the petitioner-directors, had resorted to the provisions of Section 283(1)(g). Accordingly, we hold that the 1st and 2nd peti- tioners have not ceased to be directors of the company by operation of law.
10. There is yet another allegation that the respondents have not accounted for all the money invested by the petitioners and that the respondents have siphoned off the funds of the company. The respondents have made counter allegations that the peti- tioners had collected money on behalf of the company and had not accounted [for] the same. The allegations from both the sides are devoid of full particulars/materials. In view of this, we do not propose to deal with these allegations.
11. The petition is disposed of with the finding that the allotment of 180 shares is void and that the petitioner-directors have not vacated their office as directors in terms of Section 283(1)(g). Accordingly, we direct the company to rectify the register of members by deleting the names of those to whom shares were allotted on 15.9.1997 and refund the money invested by them in the shares. We also direct that the 1st and the 2nd petitioners should be given notices for all the board meetings of the company by registered post with sufficient notice period. The same directions will hold good in respect of general body meetings also.