Company Law Board
M.M.T.C. Limited vs Indo-French Bio-Tech Enterprise Ltd. ... on 21 September, 1999
Equivalent citations: [2000]99COMPCAS112(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956 ("the Act"), on October 27, 1997, by the petitioner holding 14.79 per cent, of shares in Indo French Bio-Tech Enterprises Limited (the company), the allegations of oppression and mismanagement in the affairs of the company relate to contravention of the provisions of the Act, financial mismanagement and irregularities and breach of the promoters' joint venture agreement, etc. On the basis of these allegations, various reliefs have been claimed, inter alia, including removal of the second respondent from the position of chairmanship and directorship of the company, appointing Government directors on the board of the company, investigation into the affairs of the company and directing the second respondent to make good the losses sustained by the company.
2. The summary of the petition is as follows : The petitioner is a Government of India undertaking. The company is engaged in various agro-based activities. In the year 1994, the second respondent induced the petitioner to invest a sum of Rs. 4.75 crores in the share capital of the company by presenting a rosy picture of the future of the company that it would establish a forward integration of a fruit processing unit and that the company would export all the produce and the products through the petitioner for a period of five years renewable every five years at the option of the petitioner. A joint venture agreement was entered into on August 25, 1994, incorporating various terms. The agreement provided that the petitioner would be entitled to a service charge of 5 per cent, of the sales realisation of the first 30 per cent, of the total sales turnover in each year subject to a minimum of Rs. 78 lakhs per year and that the petitioner would have two directors as its nominees on the board and that certain decisions in the board cannot be taken without the affirmative vote of these directors. In view of the involvement of the petitioner in the share capital as well as in the affairs of the company, the public issue made by the company was oversubscribed by more than 90 times. However, once the public issue was over, the second respondent, being the chairman and managing director of the company has started oppressing the petitioner and mismanaging the affairs of the company.
3. Shri Makheeja, advocate for the petitioner, initiating his arguments submitted that the respondents have taken a stand that this petition is not maintainable on the ground that the petitioner had already filed a winding up petition. He submitted that the winding up petition was filed on account of the failure of the company to make payment of dividend for the year 1994-95, and the same was restricted only to this issue. It was not filed on just and equitable grounds which is the basis for the present petition. Even otherwise, he submitted that in A K. Puri v. Devidas Gopal Krishan Limited, AIR 1955 J & K 24, the High Court has held that initiation of a winding up proceeding is not a bar to filing a Section 397/398 petition. Further, he also pointed out that the winding up petition has been dismissed and as such that the present petition is maintainable.
4. According to learned counsel, the reply filed by the second respondent on behalf of the company and other respondents should not be taken cognizance of as he was not authorised by the board to file the said reply. Without the authority of the board, he cannot represent the company. Even though, later a board resolution allegedly passed in a meeting held on June 30, 1997, authorising the second respondent to file a reply to the petition was filed with the Company Law Board, no such resolution was passed as the agenda for the meeting did not include this business as is evident from the notice convening the board meeting at annexure P-l. He also pointed out that the petition was filed only in August 1997, and, therefore, the question of authorising the second respondent to file a reply in June, 1997, does not arise. Therefore, according to him, this resolution is a fabricated one. He also submitted that the second respondent could not have filed a reply on behalf of all the respondents inasmuch as respondents Nos. 8 and 9 had filed a separate reply. In other words, his submission was that whatever has been stated in the reply has no authority of the board of directors of the company.
5. He submitted that the promoters group holding 31.14 per cent, shares in the company and controlling the management have been guilty of various oppressive acts and mismanagement of the affaris of the company without due regard to the provisions of law. The company has paid dividend to all shareholders other than the petitioner for the financial year ended March 31, 1995. In spite of various reminders issued to the company, the amount of dividend due of Rs. 1,18,75,000 (including interest at 18 per cent, for delay in payment of dividend) has not been paid so far in violation of the provisions of Section 207 of the Act according to which the dividend declared should be paid within 42 days from May 29, 1995, when the shareholders approved the payment of 25 per cent. dividend. In view of the inaction by the company, the petitioner filed a winding up petition under Section 433/434 of the Act which was later on dismissed by the High Court of Bombay. He further submitted that the company claims to have paid Rs. 78 lakhs towards dividend, which is not correct. He submitted that the company issued a cheque for Rs. 78 lakhs ori April 20, 1995, on account of service charges as per the agreement. This cheque was dishonoured. In the meanwhile, in the annual general meeting held on May 29, 1995, the general body approved declaration of 25 per cent, dividend. Since the cheque for the service charges has been dishonoured, on persuasion by the petitioner, the company sent a pay order for Rs. 78 lakhs towards service charges on June 12, 1995. Now the company claims that this amount of Rs. 78 lakhs included pro-rata dividend of Rs. 48.48 lakhs after deduction of income-tax of Rs. 15.93 lakhs and that the balance Rs. 29.51 lakhs included the service charges payable to the petitioner. According to learned counsel, the pay order for Rs. 78 lakhs was only towards service charges and not towards payment of dividend as contended by the company. According to him, whenever a company pays dividends, it should be for the exact amount of the dividends and cannot be clubbed with any other dues and that this pay order was not sent to the company on the date when dividend cheques were issued to other shareholders. He also pointed out that till the reply was filed by the respondents in the winding up proceedings, at no time the company intimated the petitioner that the amount of Rs. 78 lakhs included the dividend in spite of the fact that this issue was raised in the board meeting and also through legal notices. He further submitted that the petitioner never received any certificate for tax deducted at source. In regard to the winding up proceedings initiated by the petitioner against the company for non-payment of the dividend, even though the High Court has dismissed the petition, it does not bar the Company Law Board from granting appropriate relief since non-payment of dividend is an act of oppression against a shareholder. Accordingly, he prayed that the company should be asked to pay the dividend due to the petitioner.
6. He further submitted that the petitioner had filed an interim application seeking to restrain the company from shifting its registered office as proposed for consideration in the annual general meeting on March 5, 1998. By an order dated March 4, 1998, the Company Law Board had directed that if the resolution relating to shifting of the registered office was carried through, the same should not be implemented till further orders. However, in violation of the said directions, the registered office was shifted. The ground for doing so as averred by the company is that the lease agreement with the landlord of the building expired on November 8, 1997, and as such it has to vacate. Learned counsel pointed out that the premises belonged to the wile of the second respondent and, therefore, he handed over the property without exercising the option of renewal with mutual consent as provided in the lease agreement itself. The matter of handing over the property was never disclosed in any of the board meetings and by handing over the property, the second respondent has acted against the interest of the company and in favour of his own wife.
7. Learned counsel further submitted that the second respondent is guilty of not sending notices for the board meeting to the nominee directors of the petitioner and also of fabrication of minutes of the board meetings. He pointed out various instances wherein either there were instances of short notices for the board meetings or absence of notice for some board meetings to stress the point that the second respondent has been running the affairs of the company as if it were his own without taking into confidence the nominee directors of the petitioner. He further submitted that in violation of the joint venture agreement by which the consent of a nominee director is a must in certain decisions, the board of the company has been taking decisions in such matters without the approval of the nominee directors. The company has not been sending notices for the annual general meetings also to the directors nominated by the petitioner in time. The notice for the fourth annual general meeting scheduled to be held on November 28, 1996, was sent to the petitioner only on November 26, 1996. This is in violation of the provisions of Section 171 of the Act according to which at least 21 days notice is to be given for annual general meeting.
8. Elaborating on the financial mismanagement of the company, he sub mitted that the turnover of the company came down from Rs. 44.24 crores in 1994-95, to Rs. 14.35 crores in 1995-96, and that the profit came down from Rs. 11.24 crores to Rs. 4.39 crores. According to him, such a heavy downfall was due to the manner in which the affairs of the company are being conducted by the second respondent. He also questioned the reasons adduced by the second respondent that the downward trend in the turnover was due to a strike in the company and that the petitioner-company did not extend necessary financial support sought for by the company at that time. Learned counsel submitted that it is the mismanagement of the company by the second respondent which had resulted in the turnover of the company coming down drastically. He also submitted that the company has not been in a position to discharge its liabilities as is evident from the fact that two complaints have been filed against the company under Section 138 of the Negotiable Instruments Act for dishonour of cheques issued by the company and some other parties have also issued notices to the company for payment of their dues. Further, the second respondent is also fudging the accounts of the company by not following the principles of accounts, with a view to show a rosy picture of the company.
9. He also pointed out that the petitioner is not only a major single shareholder of the company but also, as per the joint venture agreement, the sole exporter of the products of the company. However, with a view to enrich himself, the second respondent is exporting the products of the company on its own. The company has also at the behest of the second respondent not been paying the service charges as stipulated in the joint venture agreement.
10. He also submitted that after the petition was filed, there have been other proceedings in the Bombay High Court by way of PIL seeking directions to tfie company for repayment to investors and other creditors. The Bombay High Court has conducted investigation through the Commissioner of Police and on receipt of the report has directed the company to prepare a scheme for repayment of all the dues. This itself, according to learned counsel, would indicate that the affairs of the company are being conducted in a manner prejudicial to the interest of the shareholders, the company and the public, meriting grant of all prayers made in the petition.
11. Shri Ajay Kumar, appearing on behalf of the respondents, submitted that the petition is not maintainable as it does not satisfy the requirements of Section 397(2)(b) of the Act that there is justification to wind up the company on just and equitable grounds. According to him, relying on Subhash Chand Agarwal v. Associated Limestone Ltd. [1998] 92 Comp Gas 525 ; [1998] 2 CLJ 329 (CLB) the satisfaction of this requirement is a must before entertaining the petition. According to him, none of the allegations in the petition would merit winding up of the company on just and equitable grounds. He also submitted that the petitioner had already moved the Bombay High Court for winding up of the company and as such it cannot seek any remedy under Section 397 of the Act especially when the second limb of Section 397(2)(b) stipulates that the petitioner should make out a case that winding up of the company would not be in the interest of the shareholders. By this argument, he tried to point out that on the one hand the petitioner was interested in the winding up of the company and on the other hand by filing the petition he tries to claim that the winding up is not in his interest. He also submitted, relying on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd, [1981] 51 Comp Cas 743 that only proprietary rights as shareholder could be agitated in a Section 397 petition and since in this case all the allegations are personal in nature, the petition is not maintainable. In regard to Section 398, he stated that the petitioner has not established any acts of mismanagement in the affairs of the company. In this connection, he referred to the public interest litigation proceedings in a writ petition before the Bombay High Court (PIL 434 of 1998) to state that the High Court did not pass any order against the management of the company other than giving direction to the Commissioner of Police to inquire into the various aspects of the company and after perusing the report of the Commissioner of Police, the Bombay High Court has only directed the company to prepare a scheme for repayment of money due to investors and the creditors.
12. He further submitted that the petitioner had not discharged all its obligations under the joint venture agreement and as such cannot be permitted to take advantage of the provisions of the said agreement in the present proceedings. He also pointed out that the joint venture agreement provides for arbitration and instead of resorting to arbitration, the petitioner has instituted proceedings before the High Court as well as the Company Law Board. Thus, the petitioner has not come with clean hands to seek an equitable remedy before the Company Law Board.
13. On the merits of the case, the learned representative submitted that in so far as the dividend is concerned, the matter has already been decided by the Bombay High Court and as such the Company Law Board cannot once again adjudicate on this issue especially when the Bombay High Court was convinced while dismissing the winding up petition that the company has paid a substantial part of the dividend as claimed. In regard to shifting of the registered office, he submitted that the original proposal of the company was to shift the registered office of the company to Nasik and the resolution placed before the general body in this regard was stayed by the Company Law Board from being implemented, if the same was approved by the shareholders. In deference to the Company Law Board directions, this proposal was withdrawn from the consideration of the general body. Therefore, to say that by handing over the premises in which the registered office for functioning to the land lady, the company had flouted the orders of the Company Law Board is not correct. He pointed out that the premises in which the registered office was functioning belonged to the wife of the second respondent and was taken on leave and license agreement for a period of five years from November, 1992. Since the period of license was to expire in November, 1997, the same was handed over to the land lady.
14. In regard to the alleged financial mismanagement, Shri Ajay Kumar pointed out that during the period from November, 1995, to February, 1996, there was a massive labour strike at the company sites resulting in complete destruction of the crops of grapes and strawberry. Since the major portion of the revenue for the company accrues from the crops harvested during this period, the destruction of the crops resulted in a downward trend in the turnover. He also submitted that the petitioner-company, even though a joint venture collaborator, did not assist the company with temporary financial assistance to tide over the financial difficulties which resulted in the company being unable to discharge its liabilities. In other words, according to him, the financial difficulties experienced by the company were beyond the control of the management and as such there is no ground to allege that there had been financial mismanagement in the company.
15. As far as the management of the company is concerned, he pointed out that as per the agreement, the petitioner-company was to have two nominees on the executive committee which was to monitor the working of the company. However, the petitioner did not comply with this requirement and is making an allegation that there has been mismanagement in the affairs of the company. He further submitted that while even delegations from other countries visited the sites of the company to learn about the modern techniques adopted by the company, yet, the nominee directors never visited any of the sites to appreciate the working conditions. He also submitted that the nominee directors of the petitioner were always interested in putting spokes in taking vital decisions for survival of the company and did not contribute to the welfare of the company by offering assistance whenever needed.
16. Summing up his arguments, he submitted that this petition should be dismissed especially when the Bombay High Court is seized of the affairs of the company and when the allegations of oppression and mismanagement of the company have not been established.
17. We have considered the pleadings and arguments of counsel. At the outset we would like to record a peculiar event that took place after this petition was filed. One N. Khosla claiming himself to be the managing director of the company filed an application seeking to implead himself in the proceedings. On this application, while the petitioner-company took a stand that Shri Khosla was never appointed as the managing director, the company did not file any reply to this application. Even though Shri Khosla was personally representing himself before us on a few occasions and argued on the application, when the application was posted for final disposal on January 27, 1998, he was not present to pursue the application and accordingly, this application was dismissed. It is also necessary to note that even though the petition was served on the respondents as early as in September, 1997, and notices for hearing were sent to the respondents, they entered appearance only in the hearing held on January 27, 1998, and filed their replies only in March, 1998. Even in regard to this reply, as pointed out by Shri Makheeja, the same has been filed on behalf of all the respondents including the company. Later, respondents Nos. 8 and 9, the nominee directors of the petitioners filed a joint reply supporting the allegations in the petition. Even though we had completed the hearing as early as in January, 1999, yet, in view of the proceedings, in the Bombay High Court in the PIL, we were awaiting the results of the said proceedings. Since the parties have not informed us about the latest position in those proceedings till now, we have decided to issue this order.
18. We shall first deal with the preliminary objections raised by the respondents relating to the maintainability of the petition on various grounds. One of the grounds is that the petitioner had filed a petition for winding up of the company and as such it cannot file the present petition under Section 397 which is alternative to winding up. In this connection, it is necessary to note that the winding up petition was filed on a specific issue that the company had not paid the dividends and that it was unable to pay the dividend, under Sections 433 and 434 of the Act on the ground that the dividend has become a debt which the company has not been able to pay. In other words, this petition obviously was filed by the petitioner-company in the capacity of a creditor to the company. However, the present petition before us has been filed in the capacity of a shareholder alleging acts of oppression and mismanagement in the affairs of the company. Even though, the non-payment of dividend is also one of the allegations, yet, there are many other allegations relating to the affairs of the company. Therefore, we do not consider that filing of a winding up petition in the capacity of a creditor would bar a shareholder from filing a Section 397/398 petition in the capacity of a shareholder.
19. Shri Ajay Kumar forcefully argued that the ingredients of Section 397(2)
20. One of the main allegations in the petition relates to non-payment of dividend for the year 1994-95. Shri Ajay Kumar submitted that this allegation should not be examined by us in view of the dismissal of the winding up petition filed by the petitioner on the same issue and as such the order of the High Court and the principles of res judicata would apply. We have seen the Bombay High Court order which reads as follows : "claim made in the petition cannot be said to be an admitted liability. The reply filed by the company indicates that a substantial part of the dividend as claimed was paid and the balance claim is towards the commission. The issue requires evidence to be led by the parties for establishing the alleged claim. Hence the petition is dismissed. The petitioner shall be at liberty to file a suit for non-payment of the balance alleged dividend". From this order, we find that the said petition was dismissed on the ground that the liability had not been admitted and not on the merits of the case as is evident that the High Court itself has given liberty to the petitioner to move the civil court. Since that petition was not dismissed on the merits, the same cannot act as res judicata and as such the same can be examined by us, as non-payment of dividend due to a shareholder could be rightly termed as an act of oppression/mismanagement. The stand of the petitioner is that the amount of Rs. 78 lakhs did not include the dividend and it was only for payment of service charges. Counsel for the petitioner took us through certain documents to substantiate his arguments that the company had in fact sent a cheque for Rs. 78 lakhs towards service charges on April 20, 1995, and the same was dishonoured and that after some correspondence with the respondent-company a pay order for Rs. 78 lakhs was sent to the petitioner. According to the respondent-company, the amount of Rs. 78 lakhs included the proportionate dividend and a part of the service charges due. The respondents have also relied on the tax deduction certificates in this regard. It is on record that the respondent-company had issued a cheque for Rs. 78 lakhs towards service charges, vide its letter dated April 20, 1995, signed by the second respondent (annexure 2 to the rejoinder). It is also a fact that the said cheque was dishonoured. The respondent-company sent a pay order dated June 12,1995, for Rs. 78 lakhs. The issue for our consideration is whether this amount represented both the dividend and part of the service charges as claimed by the respondent-company or represented only the service charges as claimed by the petitioner. The admitted position is that the company declared dividend for 1994-95 on May 29, 1995. While the first cheque was prior in time to the annual general meeting, the pay order is subsequent to the annual general meeting. The respondent-company has relied on a copy of the annual return of deduction of tax from dividend to indicate that pro rata dividend to the petitioner has been paid (exhibit R-l). We find from the return that the date of payment of the dividend is shown as July 1, 1995, while the pay order issued to the petitioner-company is dated June 12, 1995. We have not come across companies paying the dividend either by a pay order or by a demand draft. The reason for payment of this amount by way of pay order, as we find from annexure 3 to the rejoinder could be that, the petitioner-company had asked for payment of Rs. 78 lakhs towards service charges by way of a pay order. According to the company, the pay order included a part of the service charges of Rs. 29.51 lakhs. We are not in a position to convince ourselves that a company would take the trouble of making payment of such an odd amount instead of rounding off the same to a nearby integer. Further, we note that the petitioner holds shares in five folios. Normally, when a company pays dividend by way of cheques, etc., the cheques are drawn folio-wise and if is so, then the company should have issued five pay orders to the petitioner. Taking all these aspects and the contemporaneous records into consideration, we are of the view that the amount of Rs. 78 lakhs represented only the service charges, and after the dispute started, the company took the stand that the amount represented the dividend and a part the service charges. Our view gets strengthened by the fact that there was complete inaction on the part of the respondent-company to react to the various letters addressed by the petitioner at pages 136 to 141 of the petition wherein it had complained about non-payment of dividend. If the intention of the respondent-company was that the pay order included dividend also, it could have replied to the petitioner in response to its letters. Therefore, we are of the view that the stand of the company in this regard is nothing but an afterthought on account of the claim made by the petitioner in the winding up petition. Therefore, we find that the petitioner has substantiated the allegation regarding the non-payment of the dividend. It is one of the basic statutory rights of a shareholder to receive the dividend declared and if the company fails to pay the same, a shareholder can definitely claim oppression/mismanagement. Since we are convinced that the company has not paid the dividend to the petitioner, it is bound to pay the same. However, we are not giving any directions as to the lime frame within which the same should be paid, as the company is in financial difficulties, other than directing the company to show the dividend due to the petitioner as "unpaid dividend" in its accounts and make it a part of the payment scheme to be prepared in accordance with the directions of the Bombay High Court. In view of the financial difficulties of the company, we are not stipulating payment of interest.
21. In regard to the allegation relating to the handing over of the registered office premises, the allegations are that by doing so the second respondent has violated our order dated March 9, 1995, and that the company should have exercised the option to renew, instead of releasing the premises and that the reason for doing so is that the landlady is the wife of the second respondent. As far as violation of our order is concerned, it is to be noted that our order was limited to restraining the company from acting on the resolution, it carried through in the annual general meeting for shifting the registered office to Nasik and did not cover releasing the premises, and as such, by doing so, the second respondent has not violated our order. Relating to the complaint that the premises were released without exercising the renewal option, only because of the personal relationship, even assuming it is so, since the same is a past and concluded event, that took place in 1995, we do not propose to deal with the same.
22. Yet, another allegation is about non-issue/delayed issue of notices for the board/general body meetings. In view of our directions later in this regard, we are not elaborately dealing with this allegation.
23. The next allegation relates to the financial management of the company. We note that the petitioner has not alleged either siphoning off of funds or misapplication of funds. This petition was filed in August 1997, and at that time the grounds for alleging financial mismanagement were that the turnover for 1995-96, had come down substantially and that the company was unable to pay its debts as was evident from the suits filed under the Negotiable Instruments Act. The reasons given by the company for the downfall in the turnover during the year 1995-96, have not been rebutted by the petitioner. The petitioner has claimed that only because of its association with the company, the public issue was oversubscribed by 90 times, and, if it is so, the petitioner being a joint venture partner, having two nominees on the board, should have taken a more active part in the management of (lie company to protect not only its interest but also the interest of the public who have invested in the shares as well as in other schemes. It is on record that the second respondent has been asking the petitioner to have two nominees in the executive committee without any positive response from the petitioner. Therefore, the petitioner cannot put all the blame only on the other directors, more particularly, the second respondent.
24. Anyway, the recent events that have taken place clearly show that all is not well with the affairs of the company and that the company is in great financial difficulties as is evident from the proceedings before the Bombay High Court in the PIL. Even though, some of the orders of the Bombay High Court have been placed before us from which we find that the Bombay High Court has directed the company to file a scheme of repayment of dues to the investors and the creditors, the result of further proceedings are not known to us. The company is a listed company having over 90,000 shareholders besides those who have invested in various agro-based schemes in the company. Thus, the element of public interest assumes greater importance than the grievances of the petitioner. Even though, Shri Ajay Kumar, in his written submissions has stated that the High Court did not observe anything adverse against the management nor has it held that the present management is responsible for the present state of the affairs of the company, the very fact that the High Court had directed the Commissioner of Police to investigate into the affairs of the company and had directed the company to frame a scheme of repayment, shows that there is ample justification for the Company Law Board to make appropriate orders in public interest as mandated by Section 397/398. The petitioner has asked for directions for investigation into the affairs of the company in terms of Section 237 of the Act and since this prayer is without particulars we are not considering the same, more so because the Bombay High Court has already directed the Commissioner of Police in this regard. Considering the state of affairs of the company and the element of public interest involved, we consider it necessary that there should be proper monitoring of the affairs of the company for some time to come. Such monitoring, according to us, could be ensured by appointment of two independent persons having legal and accounts experience on the board of the company. Accordingly, in exercise of our powers under Section 402(a) of the Act, we direct the Department of Company Affairs and the Securities and Exchange Board of India, to appoint a person with legal experience and accounts experience respectively representing the Central Government and the Securities and Exchange Board of India, as directors on the board of the company for a period of three years from the date of appointment. We also direct that notices for board meetings should be sent to all the directors including the nominees of the petitioner by registered post at least seven days before such meetings along with agenda. We also direct the petitioner, being a public sector undertaking, to ensure that its nominees attend the board meetings without fail and render all assistance to revive the company. The directors appointed by the Central Government and the Securities and Exchange Board of India will submit a joint quarterly report to the Central Government on the affairs of the company.
25. We dispose of this petition in the above terms without any order as to costs. Let a copy of this order be sent to the Central Government and the Securities and Exchange Board of India drawing their attention to paragraph 24 of the order.