Company Law Board
Smt. A. Kalyani vs Vale Exports (P.) Ltd. on 5 July, 2002
ORDER
K.K. Balu, Member
1. The petitioner constituting more than one-tenth of the total members of M/s. Vale Exports Private Limited ("the Company") as well as holding more than 10 per cent of the shares, before allotment of the impugned shares, has filed this petition under Section 397/398 of the Companies Act, 1956 ('the Act') alleging oppression and mismanagement in the affairs of the Company.
2. The main acts of oppression and mismanagement relate to the following :
(a) exclusion of the petitioner from the day-to-day affairs and business of the Company denying her statutory rights as a shareholder;
(b) denying the audited accounts and balance sheets of the Company for several years;
(c) non-convening of annual general meetings as well as Board meetings of the Company and non-sending of notices for such meetings whenever conducted, if any;
(d) illegal allotment of 2,59,000 equity shares in favour of respondents 2 to 4;
(e) illegal removal of the petitioner as a director of the Company;
(f) non-issue of share certificates for the shares originally allotted to the petitioner; and
(g) illegal appointment of directors.
3. Shri T.K. Seshadri, Advocate appearing for the petitioner, while initiating his arguments submitted that the Company was incorporated in April, 1990 by the petitioner and the second respondent being the wife and husband with the main objects of carrying on the business of acting as marketing agents, consultants, brokers etc. The petitioner and the second respondent were the first directors of the Company. Apart from the Company, the petitioner was also running a proprietary concern under the name and style of M/s. Cos. Trades. While the second respondent was running the affairs of the Company at a loss, the petitioner was making profits in her proprietary concern which resulted in certain disputes between them. Subsequently, their matrimonial relationship became estranged resulting in divorce proceedings initiated by the second respondent before the family court. In view of these disputes, the second respondent started ignoring the petitioner and excluded her from the day-to-day affairs and management of the Company. The second respondent failed to send notices for the annual general meetings and the Board meetings of the Company. The notices said to have been sent to the petitioner were all addressed to the incorrect address and not received by her. The petitioner was not given copies of the audited accounts for the years 1994-95 to 1998-99 and the balance sheet of the Company for the years ended 31-3-1991 to 31-3-1999 in spite of the written communications sent to the respondents 1 and 2. The respondents fraudulently raised the authorised capital and allotted the impugned shares, i.e., 8,600 shares to the second respondent and 200 shares each to the third and fourth respondents at the Board meeting said to have been held on 5-11-1993 and 2,50,000 shares to the second respondent at the Board meeting said to have been held on 27-3-1997. The Company being a family company, the allotment of shares cannot be made to one of the members in exclusion of other member. By virtue of the impugned allotment, the petitioner's shareholding has come down from 26 per cent to 3.4 per cent. The respondents 4 and 3 were appointed as directors at the annual general meetings held on 15-11 -1993 and 9-9-1994 (Pages 77 and 81 of typed set of documents by respondents). These proceedings are void without notice to the petitioner. The second respondent fabricated several documents and filed before the Registrar of Companies as though the petitioner ceased to be the director with effect from 1-3-1995 for not attending three consecutive Board meetings said to have been convened by the respondents. According to the petitioner, no Board meetings were convened from May, 1993 and no notice was sent for any of the Board meetings convened, if any. Thus, the petitioner was excluded from the day-to-day Affairs of the Company, removed from directorship, respondents 3 and 4 were illegally appointed as directors and the impugned shares were illegally allotted in favour of respondents 2 to 4.
4. Shri Seshadri has taken pain to point out several of the irregularities in the conduct of business of the Company as under :--
* The notices said to have been sent by the respondents by certificates of posting are concocted. The respondents failed to send notices by registered post in spite of the written request made by the petitioner in her letter dated 2-12-1999 (Page 196 of Petition).
* The minutes of the Board meeting (Page 45 of typed set of documents by respondents) said to have been held on 1-3-1995 resolving to remove the petitioner from directorship on account of her consistent absence at the Board meetings is not signed by the Chairman of the meeting. Again the minutes of the general body meeting (Page 83 of typed set of documents by respondents) of members of the Company said to have been held in September, 1995 show that members resolved that as per Section 283(1 )(g), the petitioner ceased to be a director for non-attending the consecutive Board meetings without leave of absence from the Board of Directors. Thus, the minutes of the Board meeting convened on 1-3-1995 as well as annual general body meeting convened in September, 1995 are concocted.
* The letter dated 23-12-1996 sent by Counsel for the second respondent to Counsel for the petitioner (Page 162 of Petition) shows that the petitioner continued to be director as on 23-12-1996.
* The annual return made up to 29-9-1994 (Page 34 of Petition); Memorandum and Articles of Association of the Company (Pages 123 and 135 of Petition) and the register of members and Form 32 (Page 38 of Petition) contain the full and correct address of the petitioner. However, the notices (Pages 49 to 75 of typed set of documents by respondents) sent by Certificates of Posting do not contain the complete address. The respondents have not produced certificates of posting in respect of the other directors.
* The minutes of the Board meetings held on 12-6-1994, 20-12-1994 and 1-3-1995 (Pages 39, 43 and 45 of typed set of documents by respondents) are not signed by the Chairman and are not in accordance with the Section 193 of the Act.
* The notice (Page 117 of typed set of documents by respondents) convening the annual general meeting on 10-9-1999 to adopt the audited balance sheet, profit and loss account of the Company for the year ended 31 -3-1999 is dated 30-8-1999 and sent to the petitioner on 30-8-1999 as seen from the certificate of posting (Page 119 of typed set of documents by respondents) produced by the Company. However, the auditors report (Page 265 of typed set of documents by respondents) attached to the balance sheet of the Company for the year ended 31-3-1999 is found to be signed on 3-9-1999. This is not feasible and the notice is concocted by the respondents 2 and 3.
* The letters of the petitioner (Pages 150 and 154 of Petition) requesting the Company to convene Board meetings show that the petitioner continue to be the director during that relevant period. However, the minutes of the Board meetings said to have been held on 12-6-1994 and 1-3-1995 (Pages 39 and 45 of typed set of documents by respondents) reveal that the petitioner did not continuously attend the Board meetings, which is contradictory to the requests made by the petitioner. Though the petitioner had again asked for the Board meeting on 4-11-1993 (Page 154 of Petition) and the Company failed to intimate the petitioner of the Board meeting held on 5-11-1993. (Page 31 of typed set of documents by respondents).
* Form No. 2 (Page 5 of typed set of documents by respondents) shows the allotment of 2,50,000 shares on 27-3-1997, but the Return was filed on 18-11-1999 after the dispute arose between the parties.
* Form No. 2 reveals that a sum of Rs. 20 lakhs was paid by cash and the remaining Rs. 5 lakhs by way of acquiring the assets by the Company, but the Company failed to file the requisite Form No. 3. Return of allotment discloses names of two allottees, but the register of members does not contain their names. There is no documentary proof for cash consideration of Rs. 20 lakhs made by the second respondent for allotment of shares. The counter affidavit dated 21-2-2000 (Page 15 of typed set of documents by petitioner) of the second respondent filed before the family court confirms that he has meagre income and that he has no source for payment of Rs. 20 lakhs towards allotment of the impugned shares.
* Though 200 shares were allotted to the respondent No. 4 on 5-11-1993 (Page 1 of typed set of documents by respondents), the register of members produced before the Bench does not reveal his name.
* The annual return as at 29-9-1995 (Page 50 of Petition) and the annual return as at 23-9-1997 (Page 94 of Petition) do not show the name of the fourth respondent.
* The annual return made up to 29-9-1995 (Page 48 of Petition) shows that the petitioner ceased to be a director of the Company with effect from 8-3-1995, but Form 32 filed with the ROC, Chennai (Page 3 of typed set of documents by respondents) reveals that she ceased to be a director with effect from 1-3-1995.
* The minutes of the Board meeting held on 15-11-1993, the original of which was produced before the Bench at the time of hearing, contains many corrections and are not signed by the Chairman.
* Though the petitioner by her letters dated 3-11-1999, 2-12-1999 (Pages 172, 192 and 195 of Petition) requested the Company to send notices for any meeting of the Company and also minutes by registered post forwarding the demand drafts to meet the expenses in this behalf, the Company did not adhere to the request of the petitioner.
5. While summing up his arguments, Shri Seshadri reiterated that the petitioner has been deliberately excluded from the affairs of the Company; that the petitioner's shareholding is reduced from 26 per cent to 3.4 per cent by the illegal allotment of shares to respondents 2 to 4 and that respondents 3 and 4 were illegal inducted on the Board. He, therefore, sought for the reliefs made in the petition. Shri Seshadri in support of his legal contentions relied upon the following decisions :--
(i) Mahendra Sing Mewar v. Lake Palace Hotels & Motels (P.) Ltd. [1997] 4 Comp. LJ 440 (CLB) to show that the plea of limitation does not apply to the Company Law Board proceedings and cannot constitute a ground for non-maintainability.
(ii) Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel (P.) Ltd. [1995] 3 Comp. LJ 418/[1996] 21 CLA 107 (Raj.) to show that the Company Law Board is empowered to look into the acts of oppression and mismanagement which occurred three years prior to the date of filing petition and continuing up to the date of petition.
(iii) Gopal Krishnaji Ketkar v. Mohamed Haji Latif AIR 1968 SC 1413 to show that if a party in possession of best evidence which would throw light on the issue in controversy is withholding it, the Courts ought to draw an adverse inference against him notwithstanding that onus of proof does not lie on him.
(iv) Akbarali A. Kalvert v. Konkan Chemicals (P.) Ltd. [1997] 88 Comp. Cas. 245 (CLB).
(v) Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd. AIR 1966 Cal. 512 to show that mere production of certificates of posting issued by the Postal authorities would not be conclusive proof of having served the communications upon the addressees.
(vi) Hulas Kunwar v. Allahabad Bank Ltd. AIR 1958 Cal. 644 to show that in the absence of evidence of posting the letter, there is no presumption of due delivery of the letter upon the addressee.
(vii) Panneshwari Prasad Gupta v. Union of India [1974] 44 Comp. Cas. 1 (SC) to show that unless due notice has been given to all the directors, the meeting of directors cannot be deemed to have been duly convened and that the business transacted at a meeting not duly convened is invalid.
(viii) S.T. Ganapathy Mudaliar v. S.G. Pandurangan[1999] 96 Comp. Cas. 919 (CLB).
(ix) Vijay Krishan Jaidka v. Jaidka Motor Co. Ltd. [1997] 1 Comp. LJ 268 (CLB) to show that in the absence of proper service of notice upon the directors, vacation of their office by absenting themselves for the Board meetings should be proved by the Company. In the absence of proof of service of notice upon the directors vacation of office by them under Section 283 is not proper.
(x) Rashmi Seth v. Chemon (India) (P.) Ltd. [1995] 82 Comp. Cas. 563 (CLB) to show that the directors of a company cannot utilize their fiduciary powers over the shares purely for the purpose of destroying an existing majority or creating a new majority. If the power to issue further shares is exercised by the directors not for the benefit of the Company, but simply and solely for the purpose of consolidating and improving their voting power to the exclusion of the existing majority shareholder, the Court cannot allow exercise of such powers, which have been delegated by the Company to the Board of Directors.
6. Shri V. Ramakrishnan, Counsel appearing for Respondents 1 and 2 recapitulated several of the proceedings pending before the various forums between the parties. According to him, this petition is filed only with the intention to harass the second respondent. He pointed out the strained relationship between the petitioner and the second respondent not only in the company's affairs, but also on account of personal affairs. According to him, the alleged acts of oppression and mismanagement took place in the years between 1993 and 1997, but the petitioner has approached the CLB only in February, 2000 after a lapse of more than three years. He, therefore, urged that the petition is barred by limitation, in support of which he relied upon the decision of the Company Law Board reported in 2002(1) CLJ 177 to show that the provisions of the Limitation Act will be applicable to the proceedings under Section 111 before the CLB. He further drew our attention to the decision of the Apex Court in Corporation Bank v. Navin J. Shah [2000] 2 Comp. LJ 161 to show that even if the Limitation Act does not apply, the claim must be made within the reasonable period of three years. Even otherwise, the petition should be dismissed on the ground of laches, for which he relied upon the decisio'n in A.P. Jain v. Faridabad Metal Udyog (P.) Ltd. [1998] 5 Comp. LJ 561 (CLB). The petitioner has failed to explain the long delay in initiating the proceedings before the CLB and therefore, not entitled for any relief. He further pointed out that on account of the matrimonial disputes which arose from May, 1993 between the petitioner and the second respondent, the petitioner never showed any interest in the affairs of the Company till October, 1999. All the letters sent by the petitioner are prior to the year 1993.
7. Shri V. Ramakrishnan, while arguing the matter on merits referred to the notices for all the Board meetings (Pages 53 to 73 of typed set of documents by respondents) sent to the petitioner under Certificates of Posting and categorically stated that the covers were properly addressed and posted. In this connection, he made a reference to the decision in M. Meenakshisundaram v. S. Venkatesan AIR 1981 Mad. 277 to show that in case of letters sent by certificates of posting the presumption is that the letters are delivered to the addressee. The petitioner never chose to attend the Board meetings, continuously held in February, 1994, 31-3-1994, 12-6-1994, 26-8-1994 and 20-12-1994, despite the notices and she therefore ceased to hold the office under the provisions of Section 283(l)(g). Accordingly, the Board of Directors at its meeting held on 1-3-1995 (Page 45 of typed set of documents by respondents recorded cessation of directorship of the petitioner. The cessation is on account of operation of law, in which case, the petitioner cannot be reinstated as a director in support of which he relied upon the decision reported in Vinod Kumar Mittal v. Kaveri Lime Industries Ltd. [2000] 23 SCL 176 (CLB - Delhi). Though the petitioner was requesting to convene the Board meeting in her various letters, later she did not evince interest in the affairs of the Company and failed to attend the Board meetings and annual general meeting as and when called by the Company after due notice to the petitioner. He pointed out that the petitioner did not express any grievance in her letter dated 3-11-1999 (Page 172 of Petition) regarding cessation of her directorship. Shri Ramakrishnan strongly contended that the petitioner cannot rely on the letter dated 23-12-1996 (Page 162 of Petition) addressed by Counsel for the second respondent to the petitioner in the matrimonial disputes to show that the petitioner continued to be a director, in view of the fact that the said letter was sent "without prejudice". The said letter cannot be produced as evidence in the proceedings before the CLB. In this connection, he referred to AIR's Commentary on Section 23 of the Evidence Act. Section 23 ensures that letters sent without prejudice cannot be relied on as evidence in all proceedings and not just the proceedings in which the letters were exchanged. According to Shri V. Ramakrishnan the impugned allotments were for the benefit of the Company and not for any oblique purpose. The allotment of the impugned shares was partly in kind with a view to avoid recurring cash outflow for the Company on account of periodical leasehold rent. In the circumstances, the allotments are in the interest of the Company. The petitioner has not been reduced to a minority shareholder in view of the fact that the petitioner is always in minority. He further pointed out that though the minutes of the meetings have not been signed by the Chairman, the minutes does not become invalid, but only the presumption under Section 195 with regard to their validity will not be available. However, taking into consideration the facts and circumstances of the case, the minutes produced before the CLB reflect the true proceedings of the meetings of the Board. While concluding his arguments, he submitted that by setting aside the allotments made from year 1993 running of the Company will be affected and the Company's Banker will recall the loan. In this connection, he cited the decision of the CLB report in Ashok V. Desai v. Doshi Times Industries (P.) Ltd. [2002] 26 SCL 475 (CLB - Chennai) where the CLB has declined to grant such a relief. He further submitted that though the second respondent was willing to purchase the shares held by the petitioner, the present financial position is not favourable to buy out the petitioner. However, the second respondent is willing to maintain the petitioners' shareholding at 25 per cent by allotting further shares at par value. He, therefore, sought for dismissal of the petition.
8. We have considered the pleadings and arguments of Counsel for the petitioner and the respondents.
9. Before going into merits of the case, we shall deal with the issue of limitation. While it is the contention of the respondents that the petition is barred by limitation and that the petitioner is guilty of laches, it is denied by the petitioner. The CLB has considered this issue in quite a number of cases and categorically held that plea of limitation does not arise in the case of proceedings in relation to Section 397/398 proceedings. In this connection, reference is invited to the decision in Lake Palace Hotels & Motels (P.) Ltd. case (supra). The decision is cited by Shri Ramakrishnan in regard to limitation is not applicable to the facts and circumstances of the present case. Moreover, the CLB is exercising equitable jurisdiction in its proceedings under Section 397/398. We cannot, therefore, debar the petitioner from claiming the equitable relief on merits of the case. In the circumstances, the plea of the respondents must fail.
10. In regard to the plea of the petitioner that the Company had never sent notices for the Board meetings, the Company claims that the notices were sent to the petitioner properly addressed and posted. The correct and complete address of the petitioner is found in Memorandum and Articles of Association of the Company (Pages 123 and 135 of Petition), annual return made up to 29-9-1994 (Page 34 of Petition). But all the certificates of posting (Pages 51, 55, 59, 63, 67, 71, 75 of typed set of documents by respondents) produced by the Company do not specify the road name. There is no record to show that the notices have been served upon the petitioner. In the circumstances, there is no necessity to deal with the cases cited by both the Counsel in regard to the validity of the service of notice 'by certificates of posting. In the absence of proof of service of notice upon the petitioner for the Board meetings, the proceedings of the Board are not valid as has been held in Parmeshwari Prasad Gupta 's case (supra). Therefore, the plea that the petitioner ceased to be a director by virtue of Section 283(1)(g) must fail. Moreover, in the minutes of the Board meeting said to have been held on 1-3-1995 (Page 45 of typed set of documents by respondents), the cessation of the petitioner as a director is found to be recorded. Again, the minutes of the annual general body meeting of members said to have been held in September, 1995 (Page 65 of typed set of documents by respondents) show that the petitioner ceased to be a director for non-attending the consecutive Board Meetings without leave of absence from the Board of Directors. Thus, the cessation has been recorded on 1-3-1995 as well as in September, 1995, both of which cannot be correct. The letter dated 23-12-1996 (Page 162 of Petition), unequivocally shows that the petitioner continued to be a director as on that date. The plea of the respondents that the said letter cannot be relied upon in the present proceedings is not tenable, in view of the fact that the said letter is in relation to the divorce proceedings. Therefore, in our view, the said letter can be relied on as evidence in the proceedings before the CLB. For all these reasons, the petitioner cannot said to have ceased to be a director by virtue of Section 283(1 )(g).
11. From the various instances pointed out by Shri Seshadri, we are convinced that there has been manipulation of the minutes of meetings of Board of Directors and as such they cannot be relied on insofar as allotment of shares impugned in the petition is concerned. There is nothing on record to show that offers were made to the petitioner even though she was the only other shareholder in the Company. Even though the respondents have contended that the petitioner had always been a minority and therefore non-allotment of further shares to her cannot be considered to be either for creation of a new majority or for conversion of a majority into minority, yet, when there are only two shareholders, allotment of shares to only one of them is a clear act of oppression. While, we do find that by allotment of further shares, the Company has been benefited, yet, in our view, the petitioner should have offered further shares.
12. On a overall assessment of the facts of the case, we are convinced that the petitioner has made out a case under Section 397 and as such deserves to be granted appropriate relief. The second respondent is willing to allot further shares to the petitioner to maintain 25 per cent shareholding which is not acceptable to the petitioner. It is on record that matrimonial disputes between the parties have been going for long and they are not in talking terms. They are living separately. In the circumstances, by either allotting shares to the petitioner to her entitlement or setting aside the impugned allotments and restoring her directorship would not put an end to the acts complained of. Moreover, by setting aside the impugned allotments, the affairs of the Company and interest of its Banker will be adversely affected. Therefore, mere restoration of the shareholding position as it existed before the allotments of the impugned shares and putting the petitioner in the Board would only result in the percolation of the matrimonial differences into the affairs of the Company. Even though, our advice that the petitioner could consider going out of the company was accepted by both the parties, yet they could not reach an acceptable term of settlement. Under these circumstances, taking into consideration the interest of the Company and also to put an end to the acts complained of, we direct the second respondent to purchase the shares held by the petitioner. The consideration for the shares could be either the investment made by the petitioner together with appropriate rate of interest or the fair value of shares based on the balance sheet as on 31st March, 2000, being the proximate date of petition. Therefore, we give the option to the petitioner to decide as to which of the two options she desires to choose. In case she desires to have the investment made by her to be returned, the same will be returned together with a simple interest at the rate of 20 per cent per annum from the date of investment till the date of payment. In case, she desires to have the fair value determined as on 31st March, 2000, the same will be determined on the basis of all the shares that were in existence on that date, since the amount received as consideration for the further shares that were allotted and impugned in the petition had been utilized by the Company for a long period. She should indicate her option before us on 9-8-2002. In case she desires to get her investment back with interest, the same should be paid to her by the second respondent within a period of 30 days from the date of exercising the option. In case, she chooses the second option of having the fair value determined, we shall appoint an independent valuer to value the shares.
13. The petition is disposed of in the above terms, keeping it open only for ascertaining the option of the petitioner and if necessary for appointment of an independent valuer.