Company Law Board
Scholastica Antorny vs Azhimala Beach Resorts Private ... on 5 October, 2006
Equivalent citations: [2007]139COMPCAS618(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. The petitioner holding in excess of 10% of the issued capital of M/s. Azhimala Beach Resorts Private Limited ("the Company") aggrieved on account of certain acts of oppression and mismanagement in the affairs of the Company namely, (a) irregularities in financial transactions of the Company; (b) non-maintenance of statutory records and books of account and non-finalisation and adoption of the accounts; (c) improper convening of the board meetings; (d) non-delivery of share certificates; (e) removal of the petitioner from the office of director; and (f) exclusion of the petitioner from taking part in the day-to-day affairs of the Company, has invoked, in the present petition, the provisions of Sections 397 and 398 of the Companies Act, 1956 ("the Act"), seeking the following reliefs:
(i) to declare that the removal of the petitioner from the office of director is illegal;
(ii) to permit the petitioner to take an inspection of the books of account and statutory records of the Company;
(iii) to direct the Company to deliver the share certificates in respect of the holding of the petitioner.
(iv) to direct the Company permitting the petitioner to have access/entry to the Company.
2. According to Mr. P.P. Zibi Jose, learned Authorised Representative, the Company is a private limited company, incorporated in October 2003 with the main object of setting up a resort at Azhimala, Kerala. The petitioner is one of the promoter directors holding nearly one-third of the issued and paid up capital of the Company. The petitioner is the sister of the second respondent, whose wife is the fourth respondent herein. The affairs of the Company are managed by the board of directors, namely the petitioner and the respondent Nos. 2 to 4, with the second respondent as managing director. The directors, immediately on incorporation of the Company, took the initiative to implement the resort project and all the directors were involved in all the aspects of the project management. However, after commencement of the project, the respondents 2 to 4 started indulging in several of non-transparent financial transactions and excluded the petitioner from the day-to-day affairs of the Company. The Company is not maintaining proper books of account and statutory records, ever since incorporation of the Company and did not finalise the accounts for the previous financial years. The petitioner has been avoided for the board meetings. At the annual general meeting held on 08.04.2005, the petitioner has been removed from the office of director, which is illegal and contrary to the articles and the provisions of the Act. The petitioner never received any notice prior to her removal from directorship of the Company. The petitioner is constrained to file civil suit in O.S. No. 1640 of 2004 before the Munshiff Court, Thiruvananthapuram, for an order of injunction restraining the respondents 2 to 4 to convene any meeting of the board of directors, without notice to her. The petitioner is further denied physical entry to the Company's premises, which resulted in a police complaint seeking protection to enter the premises of the Company. The petitioner has not been issued with the share certificates by the respondents till date. Mr. Jose, learned Authorised Representative, therefore, sought the intervention of the CLB by making appropriate directions.
3. Shri V. Ajakumar, learned Counsel appearing for the respondents submitted that the petitioner and her husband are making repeated attempts to hamper the smooth functioning of the resort: and the Company, with the object of harassing these respondents. The petitioner has filed a number of vexatious litigations and false police complaints against these respondents. The respondents never excluded the petitioner from the day-to-day affairs of the Company. The financial transactions were done with the consent and approval of all the directors and the petitioner being an authorized signatory has signed all cheques for and on behalf of the Company. Almost all decisions were taken in full agreement and all resolutions were passed unanimously. The books of account and the statutory records are properly maintained. Whereas, the petitioner and her husband illegally removed certain account books, thereby the auditing could not be completed. However, the Company reconstructed the books of account and filed the balance sheet and never committed any statutory default. The annual general meeting was held on 08.04.2005 after serving due notice to all the shareholders including the petitioner. The directors are to retire annually, in terms of the articles of association and they are eligible for re-election. Inspite of receipt of the notice, the petitioner kept away from the meeting and never offered herself as a candidate for election to the office of director. The petitioner was not, therefore, re-elected as a director of the Company. Consequently, she ceased to be a director and the respondents cannot be blamed on any account. The petitioner was never removed from directorship, as claimed by her. The petitioner is entitled to enter the registered office of the Company and exercise all her rights as a shareholder in accordance with the Act. At the same time, she is not entitled to interfere with the day-to-day management of the resort, which is vested with the second respondent, in his capacity as managing director of the Company. The petitioner has not made out any case under Section 397/398 of the Act and hence the petition is liable to be dismissed.
4. I have considered the arguments advanced on behalf of the parties. The main grievance of the petitioner is that she has been removed from the office of director, without any prior notice to her, which is in contravention of the provisions of the Act. It is the petitioner's version that the "petitioner was unable to attend the annual general meeting on account of health problems, the other directors removed the petitioner and later informed that the petitioner was removed as a director of the Company, through a letter dated 30.04.2005" (para 4 in page 4 of the company petition). It is therefore, far from doubt that the petitioner had adequate notice of the annual general meeting held on 08.04.2005. It is further, clear from the communication dated 30.04.2005 of the second respondent addressed to the petitioner that she was not reappointed by the members at the annual general meeting of the Company held on 08.04.2005. By virtue of Section 255(2), in case of a private company which is not a subsidiary of a public company, in default of any regulations in the articles, the directors have to be appointed in a general meeting. This sub-section does not provide for retirement of any director periodically, in which case retirement depends entirely on the provisions contained in the articles of association of the company. The articles in the instant case are silent about the retirement of directors, in which case, by virtue of Section 255(2) the directors of the Company will have to retire at the end of each annual general meeting. At this juncture it has to be borne in mind that the petitioner is one of the promoter directors of the Company. The minutes of the annual general meeting held on 08.04.2005 indicate that the Chairman conveyed to the members that the petitioner was absented from the meeting expressed her unwillingness for re-appointment as a director and hence, her reappointment was not considered by the members. Whereas, it was argued on behalf of the respondents that inspite of receipt of the notice the petitioner did not turn up to attend the general body meeting and never offered herself for election to the post of director. There was no occasion to elect her to the board. The resolution passed at the annual general meeting is contradictory to the averments contained in the counter statement (para 4 in page 3 of counter statement) and the submissions made by learned Counsel for the respondents. Furthermore, applying the principles of legitimate expectation, the petitioner being a promoter director must form part of the board of directors of the Company, which simultaneously, satisfies the spirit of the articles of association of the Company, which do not provide for retirement of the directors. The purported irregularities in financial transactions of the Company, apart from lacking details remain without being established by the petitioner. The remaining grievances of the petitioner, which are general in nature cannot be the basis for a petition under Section 397/398 of the Act. The Company is running a resort and any winding up order against the Company on just and equitable grounds would unfairly prejudice the Company and its members. In view of my foregoing conclusions I am of the view that the Board of Directors of the Company shall comprise of the petitioner and the respondents 2 to 4. Accordingly, the members are at liberty to constitute the board of directors of the Company providing proportional representation to the petitioner and the respondent 2 to 4, which shall appropriately be incorporated in the articles of association of the Company. The board of directors constituted in terms of this order will manage the day-to-day affairs of the Company as per its articles without interference of any outsiders and take appropriate action on the issue of share certificates to the shareholders including the petitioner. Ordered accordingly. These reliefs are granted in order to do substantial justice between the parties. With these directions the company petition stands disposed of.