Company Law Board
Dr. A.C. Chaudhuri And Mrs. Purnima ... vs Canadian School Of India Private ... on 23 April, 2003
Equivalent citations: [2003]47SCL672(CLB)
ORDER
K.K. Balu
1. The petition in CP 23/2002 ("the first petition) is filed under Sections 397/398 of the Companies Act, 1956 ("the Act") against M/s. Canadian School of India Private Limited ("the Company") and others alleging that the affairs of the Company are being conducted in a manner prejudicial to the interests of the petitioner and seeking the following reliefs:-
(i) to set aside the increase of the authorized capital of the Company from Rs. 5,00,000 to Rs. 4,00,00,000;
(ii) to set aside the allotments of all equity shares made in the purported Board meeting of 24.10.1999;
(iii) to nullify the Technical Services Agreement dated 19.06.1999 (Annexure P-11) entered into between the Company and sixth respondent;
(iv) to nullify the Memorandum of Understandings dated 18.03.1997 (Annexures P-12 and P-13) entered into between M/s. Sterling Developers Private Limited and the Company and restrain the eighth respondent from interfering with the affairs of the Company;
(v) to nullify the Consultancy Agreements (Annexure P-14 and P-15) entered into between The Company and the fifth respondent;
(vi) to declare the partnership deed dated 11.12.2000 (Annexure P-21) draw between M/s. Sri Lakshmi Durga Siddartha Education Institutes Private Limited and the Company as null and void and restrain the eighth respondents from doing any act in pursuance thereto;
(vii) to appoint an independent auditor to investigate into the accounts of the Company and the relationship of the respondents 2 to 4, 6 & 8; and
(viii) to surcharge respondents 2 to 4 and 6 and direct them to return the shiponed amounts from the accounts of the Company.
2. The petition in CP 7/2002 ("second petition") is filed under Section 111 of the Act against the Company and another rectification of the register of members of the Company in respect of 33,75,000 equity shares of Rs. 10/- each impugned in the petition by deleting the name of the second respondent.
3. The petition in CP 223/2002 ("third petition") is filed under Section 186 of the Act against the Company and others to order an extraordinary general meeting of the Company and give such directions as sought in the petition.
4. The petitioners in CP 23/2002 and CP 7/2002 are respondents 2 & 3 in CP 223/2002. The Company is common in all the three petitions. The respondent No. 4 in CP 23/2002 is the second respondent in CP 7/2002 and the petitioner in CP 223/2002. The reliefs sought in CP 7/2002 and CP 223/2002 are dependent on the outcome of the petition in CP 23/2002. In view of this, all these petitions were heard together with concurrence of learned Counsel appearing on behalf of the both the side sand as such are being disposed of by this common order.
5. Shri C. Harikrishnan, Senior Advocate appearing for the petitioners in CP 23 of 2002 and CP 7 of 2002, while initiating his arguments traced the background of the first petition and also the evolution of the Company. The first petitioner is a retired professor from Ryerson University, Ontario, Canada and domiciled in Canada. The first petitioner being an academician, educationalist and member of several of consultative bodies and as well as representative of the Department of Education, Government of Canada, Ontario has been instrumental in establishing and operating international schools in various countries including those in India and Hong Kong. During the year 1992, the first petitioner had desired establishing a school of international standard in India to cater the needs of foreign citizens, ex-patriates and non-resident students living in India. Accordingly, the first petitioner was pursuing with the Government of India and many others from time to time to set up a school at Bangalore. In the meanwhile the first petitioner with his wife, being the second petitioner, had incorporated the Company in March, 1996, with authorized capital of Rs. 5,00,000/- and issued capital of Rs. 200/- consisting of 20 equity shares of Rs. 10/- each. The petitioner are the signatories to the Memorandum of Association of the Company. The sixth respondent, a body corporate incorporated under the laws of Canada making investments in educational institutions held by respondents 2 & 5 came forward to convert the Company as a joint venture. The first petitioner initiated steps seeking approval of Union of India - Secretariat For Industrial Approvals ("SIA") for foreign Collaboration, which was obtained in September 1996, upon which the first petitioner identified suitable premises at Bangalore for commencing the school and entered into not a Leave and License Agreement dated 01.10.1996 on monthly license fee of Rs. 2,37,000/- with an interest free refundable security deposit amount of Rs. 29,55,000/- paid by the first petitioner. The respondents 2, 3 and the fifth respondent were co-opted into the Board of Directors of the Company in June 1997 pending the actual remittance of funds into the Company. The first petitioner was recognized as an Ontario Agent for the school by the Government of Canada, in accordance with the Canadian laws for establishing a school in India. Thereafter, a Joint Venture Agreement dated 10.06.1998 ("JVA") came to be entered into between the first petitioner and the sixth respondent, according to which the sixth respondent should hold 90 per cent and the petitioners 10 per cent of the equity shares in the Company. Shri Harikrishnan referred to the JVA for the various terms and conditions contained therein. As the petitioners are domiciled in Canada, the second respondent and his son, being the third respondent, have been in control of the day-to-day affairs and financial operations of the Company. However, the respondents 2 & 3 failed to convene the board meetings regularly and the petitioners were not receiving notices of any annual general meeting or meetings of Board of Directors of the Company. The petitioners did not have opportunity of knowing the day-to-day affairs of the Company till a school managed by the respondents 2 & 3 in Hong Kong came to be closed on account of their mismanagement. The petitioners came to know, on carrying the enquiries and investigations in the affairs of the Company of the following irregularities in the Company:-
* The respondents 2 & 3 substituted the fourth respondent in the place of the sixth respondent to invest in the Company without the knowledge and consent of the petitioners and obtained the approval of the SIA for the said substitution and nomination of the fourth respondent. The entire substitution process was without the knowledge of the petitioners and with sole intention to defraud the Company and the petitioners.
* Remittances were received towards the allotment of the impugned shares in favour of the Company from VP Bank Finanz, Zurich, Switzerland and not from the fourth respondent. However, the allotment of shares was fraudulently made in favour of the fourth respondent, said to be an "affiliate" of the sixth respondent, instead of the sixth respondent as per the JVA, misleading the SIA in according granting their permission for the substitution and allotment of the shares in favour of the fourth respondent.
* The Company entered into a Technical Services Agreement with the sixth respondent agreeing to pay a royalty of US $ 75,000 every year for providing technical services for a period of two years, ignoring the fact that the first petitioner was providing technical services. The Company continued to pay the consultancy fees to the sixth respondent even after expiry of the stipulated period of two years contrary to the agreement and siphoned of valuable foreign exchange in the guise of Technical Service Agreement for their personal gains.
* The respondents 2 & 3 colluded with the eighth respondent and entered into a Memorandum of Understanding in March 1997 to take one lease a property in Bangalore and also to enter into a joint venture agreement to set up a school near Bombay, contrary to the JVAs.
* The respondents 2 & 3 had not sent notice of any annual general meeting of the Company or the meetings of the Board of Directors of the Company. The balance sheets were never placed before a general meeting and the petitioners are not being allowed to take part in the affairs and management of the school by the respondents 2 & 3.
* The Company had entered into Consultancy Services Agreement with the fifth respondent and one Mr. Gary Diamond (GD) for payment of monthly remuneration of US $ 5,275 for the services of the fifth respondent and GD. The second respondent had entered into an agreement with GD and fifth respondent in collusion with the fourth respondent agreeing to transfer in their favour 25 per cent and 50 per cent of the shares respectively held by the fourth respondent, with the sole object of siphoning of funds of the Company and excluding the petitioners from the affairs of the Company.
* The school admitted several Indian students and collected huge sums of monies in Indian rupees in violation of the terms and conditions of the approval of the SIA.
* The Company had taken unsecured loans from the fourth respondent without approval of the Government of India.
* The authorized capital of the Company was increased from Rs. 5,00,000 to Rs. 4,00,00,000 without a resolution of the general meeting of the Company and the authorized share capital so increased was issued to the fourth respondent at the Board meeting said to have been held on 30.05.2000. The petitioners did not attend any such Board meeting and there were no other directors on the board at the relevant point of time.
* The second and third respondent had illegally recorded that the fifth respondent had resigned from the Board of Directors of the Company as of 31.07.2001 at the Annual General Meeting of the Company said to have been held on 13.09.2001.
* The second and third respondents had made purchases of jewellery for their personal needs from and out of the funds of the Company and availed of other benefits, by which the Company suffered losses to the tune of Rs. 71 lakhs.
* The second and third respondents had entered into a partnership agreement on behalf of the Company with the eighth respondent to set up a school at Hyderabad pursuant to which invested a sum of Rs. 53 lakhs without obtaining the approval of the Board of Directors of the Company.
* The respondents 2, 3 & 5 were managing yet another school in Hong Kong with 380 students and 50 staff members, which came to be closed on account of the mismanagement in the affairs of the said school by these respondents.
* The basic substratum of the Company is that the petitioners and the sixth respondent are to run the school for foreign expatriates alone in accordance with the permission granted by the SIA which was totally destroyed by these acts of respondents 2 & 3. The school is now run by the eighth respondent who has no expertise in the field nor status in the Company and has no role to play in the affairs of the Company. The role of the first petitioner has been reduced to nothing, which is not in the public interest.
6. Shri Harikrishnan, in support of his claim on the importance and role played by the first petitioner since inception in setting up the school, referred to the letters dated 14.09.1992 and 28.09.1992 (Pages 40 to 43 of the Petition) of the petitioner addressed to the then Prime Minister of India and Minister of Education; the letter dated 07.06.1995 of the second respondent (Page 31 of rejoinder); the letters dated 07.04.1994, 20.08.1994 and 24.01.1995 (Pages 46 to 48 of Petition) of the various individuals; and the letter dated 19.06.1995 (Page 32 of the Rejoinder) of the second respondent; From the preamble of the JVA (Page 92 of the Petition), Shri Harikrishnan pointed out that the first petitioner had taken all the steps for formation of the school. The first petitioner and sixth respondent were to deal with the school and not by anybodyelse. The school was to be run only by the petitioners. The shareholding of the sixth respondent and the first petitioner should be at the ratio of 90 per cent, 10 per cent respectively, which should remain unchanged at all times, unless otherwise mutually agreed between the first petitioner and the sixth respondent The Board of Directors of the Company should consist of the first petitioner and the respondents 3 & 5. Clause 10.1 provides that in the event of conflict between the provisions of JVA and the Articles of Association, the JVA has to prevail. Clause 10.10 provides that in the even of any conflict between the JVA and the Memorandum and Articles of Association of the Company, the JVA should prevail subject to provisions of the law. Shri Harikrishnan pointed out that Article 21 of the Articles of Association of the Company provides that the petitioners are the first and permanent directors. As per Article 26 the other directors will retire on rotation. This shows that the respondents can be directors at the pleasure of the petitioners. The letter dated 07.06.1995 (Page 31 of Rejoinder) of the second respondent categorically states that the sixth respondent was to secure the school building. The petitioners would be given status in the second who would decide the role of the respondents from time to time. The second and third respondents were brought in as financial supporters, who would be functioning as may be desired by the petitioners. Against this background, Shri Harikrishnan reiterated that the respondents cannot plead that they would run the school as they desire. However, the respondents 2 & 3 excluded the petitioners from day-to-day affairs and management of the school and forcibly took over the school ousting the petitioners from the school. According to Shri Harikrishnan, the letter dated 08.06.2000 said to have been sent to the Reserve Bank of India by the first petitioner (page 31 of Vol.II) is forged and fabricated document and no reliance can be placed on the said letter. There is also no necessity to send such a letter to the RBI in June 2000. The letter sent to the RBI is after the alleged Board meeting held on 30.05.2000, where the shares were already allotted. Therefore, there is no need to write this letter to the Reserve Bank of India. If their shares were to be allotted to the fourth respondent on 30.05.2000 there was no necessity to stipulate in the JVA that the Company should allot 90 per cent of the equity shares in the favour of the sixth respondent. The said letter is for Rs. 56 lakhs whereas the allotment made was for Rs. 3.75 crores. This letter has been produced by the respondents of which the petitioners have no knowledge. In the circumstances, there is no need to amend the foreign investment certificates, which cannot be accepted on their face value. Shri harikrishnan pointed out that the respondents in the present case played fraud on the Reserve Bank of India and the SIA for the allotment of shares in favour of the respondents which can be challenged before the CLB and need not necessarily be before the concerned authorities. In this connection, he referred to S.P. Chengalvaraya Naidu v. Jagannath - AIR 1994 Supreme Court 853 - to show that a judgment or decree obtained by playing fraud on the court is a nullity and non est in the eyes of law. Such a judgment/decree has to be treated as a nullity by every court. It can be challenged in any court even in the collateral proceedings. In view of the fraud played by the respondents, Shri Harikrishnan urged this Bench to investigate these illegalities in exercise of its powers under Section 10E and as held in Rajinder Kumar Malhotra and Ors. v. Harbanslal Malhotra and Sons Ltd. and ors. - (1996) 87 CC 146. Shri Harikrishnan pointed out that the remittances were received from the fourth respondent over a period of time from 24.05.1996 to April, 1998, which are not in tune with the JVA, according to which the funds ought to have been brought by the sixth respondent. He further pointed out that the JVA which was executed on 10.06.1998 ought to have mentioned the remittances received from the fourth respondent and also questioned as to why there should be amendments to the Certificates of Foreign Remittance in the year 1998 in spite of the fact that SIA permission was sought on 07.05.1999 to substitute the fourth respondent. The payments by the fourth respondents were concealed upto June 2000. There has been no transparency as to how fourth respondent came to make the remittances. The CLB should consider the interest of the school and the students. the petitioners were not in India at the relevant point of time when the general meetings and the meetings of the Board of Directors said to have been convened by the petitioners. The minutes of the general body meeting at page 31 of Vol.VII, according to the petitioners was not signed by them. It shows that the minuets were signed by the second respondent on behalf of the petitioners. There was no authority given to the second respondent to sign the minutes, in absence of which the minutes do not comply with the provisions of Section 193. Consequently, the presumptive value under Section 195 cannot be claimed, in which case, the respondents are bound to establish the validity and genuineness of the minutes of the extraordinary general meeting said to have been held on 24.10.1999. There was no approval for the Board meeting as recorded in the minutes of the general meeting. No form-5 was filed with copy of the resolution. There was also no pleadings to the effect that meeting was held at Canada. The averments made in Para 22 of the Counter Statement are in contradiction to the minutes of the extraordinary general meeting. The minutes of the Board meetings said to have been held on 30.06.1997, 01.08.1997, 04.05.1999 and on 05.05.1999 (Pages 4, 34, 17 & 40 in Vol.II) are all fabricated. According to the petitioners, these minutes were written on the same date after filing of the petition in CP 23 of 2002. Moreover, the petitioners were at Canada in those days support of which he relied upon the travel documents (Pages 15 to 24 in Vol.VI). He further pointed out in May 1999, there was no necessity to convene the Board meeting on consecutive dates, viz., 04.05.1999 and 05.05.1999. The respondents have failed to produce the minutes book in spite of calling for the same by the petitioners. In regard to the partnership deed dated 11.12.2000 (page 164 in Vol.I). Shri Harikrishnan pointed out that the draft partnership deed was approved by the Board only on the subsequent date. Thus, the partnership deed is a fabricated document. He further pointed out that the sixth respondent remained ex-parte and the pleadings are verified by the eighth respondent who is not connected with the school. The director's report forming part of the balance sheet of the Company for the year ended 31.3.2000 (Page 137 in Vol.I) reveals that the Company had collected Rs. 4 crores every year in foreign currency Pages 137, 138 in Vol.I) but failed to account for the huge earnings in foreign exchange. The school had admitted the Indian students and collected the amount in Indian rupee against the terms of SIA. The school is engaging the services of teachers, whose qualification is not even known to the authorities of the school as seen from Page 139 in Vol.I. Shri Harikrishnan, sought for the reliefs made in the petition.
7. Shri T. Raghavan, Senior Advocate appearing for the respondents while denying the alleged acts of oppression and mismanagement in the affairs of the Company has submitted that the petitioners have claimed in the petition that the authorized capital of the Company is Rs. 4,00,00,000 consisting of 40,00,000 equity shares of each Rs. 10/- each and the issued & paid-up capital is Rs. 3,75,00,000. The averment in the petition that the capital structure and holding in the Company are in dispute in quite vague. Moreover, the petitioners have taken consistent plea in legal notice dated 25.02.2002 sent by the first petitioner, civil and criminal proceedings initiated against the petitioners that they hold 3,75,000 shares and that the fourth respondent holds 90% equity shares of the Company. These categorical admissions on the part of the petitioners do not entitle them for any of the reliefs claimed in the petition. In this connection, he referred to B.L. Sreedhar and Ors. v. K.M. Muni Reddy (Dead) and Ors. - (2002) 2 SLC 355 - to show that estoppel may itself be the foundation of a right as against person estopped. In the present case, Shri Raghavan pointed out that estoppel destroys the rights of the petitioners by their admissions and conduct as borne out by various pleadings in the Company Petition and various other civil and criminal proceedings. According to Shri Raghavan, by virtue of provisions of Section 17 of the Evidence Act, admission made in the pleading is superior and admitted facts need not be approved by the paries as per Section 58 of the Evidence Act. These admissions on the part of the petitioners nullify the dispute in respect of the capital structure. According to Shri Raghavan, the JVA dated 10.06.1998 (Page 92 of Petition) establishes the capital structure of the Company. Clause 3.3 of the JVA provides that the shareholding of the petitioners and the sixth respondent should be at the ratio of 10 per cent and 90 per cent respectively. The petitioner's holding of 3,75,000 shares represents 10 per cent of the share capital of the Company. Clause 4.1 recognises the majority of the respondents on the Board of Directors of the Company. Clause 4.2 provides that the third respondent should be the Chairman. Though Article 4.4 of the JVA provides that Article 21 of the Articles of the Company should be got altered in the manner provided by the Act, reflecting the intention of the parties relating to the composition of the Board of Directors as provided in the JVA, the petitioners never took any interest in this behalf. The petitioners are in the position of Trustees, but never honoured the Agreement. They lacked bonafides. Shri Raghavan pointed that the fourth respondent is a corporate body held by the respondents 2 & 3. In this connection, Shri Raghavan referred to the letter dated 22.02.2002 (Page 91 of Vol.II) of the first petitioner addressed to the fourth respondent and also the fax message dated 21.5.2002 (Page 46 of Vol.II) to show that the shares of the fourth respondent are in entire control and possession of the second respondent. Thus, the fourth respondent is the second respondent's company, in which case, the allotments to the fourth respondent is fully valid. The fourth respondent had brought in Rs. 3.62 crores between 10.09.1996 and 09.04.1998 which has been admitted by the petitioners in all the proceedings both civil and criminal initiated prior to the company petition. The inspection report (Vol.X) does not reveal any irregularity in the functioning of the school. The inspection report is quite exhaustive. The school is now permitted to admit Indian students too. In the present Company Petition, the public interest and interests of the students and teachers are involved. The grievance of the petitioner is that the school is now in the hands of the eighth respondent, but no allegation has been made against him in the entire petition except at one place. The charges leveled against the eighth respondent in rejoinder do not merit and value. Even according to the petitioners as stated in Para (g) Page 9 of the Petition, the second, third and fifth respondents were co-opted into the Board of Directors of the Company on 30.06.1997, whereas the petitioners have questioned the co-option of these respondents in Para 6(h) in Page 7 of CP 7/2002. The first petitioner had taken an amount of US $ 6,000 in Indian rupees by way of an advance against any future dividends that may be declared by the Company as seen from page 64 in Vol.II. Shri Raghavan contended that the second respondent never received the special notice said to have been sent under Section 284 of the Act before removing him from the Board of Directors of the Company. The charges of the petitioners on account of the second respondent were never communicated by means of any communication prior to the special notice said to have been sent to the respondent. The petitioners being permanent directors could have convened general meetings or Board meetings, but never took interest in the affairs of the Company. Though form-32 has been filed pursuant to the purported removal of the second respondent from the Board of Directors, no extract from the minutes of the Board meeting removing the second respondent has been filed. Though the first petitioner had filed a civil suit before the court of City Civil Judge, Bangalore, seeking an order of permanent injunction restraining the respondent from any manner transacting, interfering or managing with the affairs of the Company, he later withdrew the suit. The petitioners never took interest in attending any of the meetings convened by the Company in spite of the notices sent to them, during the period between 21.07.1997 to 02.07.2001 (Pages 1 to 7 of Vol.V). The extract from the outward register evidences dispatch of notices (Pages 16-37 of Vol.V) to the petitioners. The respondents have been complying with the statutory requirements including adoption of accounts from time to time without any default. According to the respondents, the petitioners were never excluded from the day-to-day affairs of the school. The grievance of the petitioners that the school run by the respondents in Hong Kong has been closed, cannot be a ground for claiming relief in the present Company Petition. The reliefs claimed in the petition to set aside the increase of the authorized capital from Rs. 5 lakhs to Rs. 4 crores and cancellation of the allotment of the impugned shares made at the Board meeting held on 30.05.2000, if granted, would result in closure of the school which is against public interest and also the interest of the students as well as teachers. The respondents having brought in huge capital would be placed in disadvantageous position and put to irreparable loss. The public notice (Page 81 in Vol.II) caused by the petitioners admits the position of Board of Directors of the Company. The said notice has been subsequently withdrawn by the petitioners. This is a pressure tactics adopted by the petitioners to extract money from the respondents. The petitioners have not produced any document to show that they had earlier asked for convening of any Board meeting. The complaint made by the first petitioner before the Court of the Additional Chief Metropolitan Magistrate, Bangalore confirm the remittances made by the fourth respondent. The certificate dated 06.10.20002 issued by Standard Chartered Bank (Page 67 in Vol.IV) shows the remittances made by fourth respondent which were credited to the savings account of the first petitioner. The letter dated 08.06.2000 of the first petitioner addressed to the Reserve Bank of India (Page 31 of Vol.II) refers to the payments stated in the letter dated 06.10.2002 of Standard Chartered Bank. The probabilities in regard to the genuineness of the letter of the first petitioner to the RBI is in favour of the respondents. There is no need to examine the parties as sought by the petitioners. According to the respondents, the Company at the Board meeting held on 30.05.2000 had allotted 37,50,000 equity shares at Rs. 10/- each out of which 3,75,000 shares were allotted to the petitioners. However, the petitioners did not bring in funds for the allotments made in their favour. At the same time, the credit balance which the fourth respondent had with the Company was appropriate towards the allotment of shares made in favour of the petitioners as seen from the proceedings of the Board meeting held on 30.05.2000 (Annexure R-1 in Vol.II). Thus, 3,75,000 equity shares were allotted to the petitioners from and out of the funds brought in by the fourth respondent. The first petitioner had neither paid the lease amount or security deposit while entering into a Lease and License Agreement in October 1996 as revealed from Annexure R-2. According to the respondents, the petitioners had advised the Company that he authorized capital had been increased from Rs. 5 lakhs to Rs. 4 crores by way of passing necessary resolution, upon which the Company has filed form-5 on 22.11.1999 with the Registrar of Companies, Karnataka. As per the JVA, the sixth respondent either by its or through its affiliates is empowered to hold 90 per cent and the first petition 10 per cent in the capital of the Company. The fourth respondent is an affiliate of the sixth respondent. Therefore the Board of Directors had at its meeting held on 04.05.1999 decided to substitute the fourth respondent in the place of the sixth respondent, on account of the administrative reasons as borne out by the extract of the minutes of the Board of Directors (Annexure R-5 - Page 17 in Vol.II). While seeking the approval for substitution of the fourth respondent from the SIA, the Company had sought permission for investment of Rs. 3,37,50,000/- by the fourth respondent; for allotment of the impugned shares to the fourth respondent and for returning the excess money already remitted by the fourth respondent to it which wee permitted by the SIA by its letter dated 14.06.1999. In addition, the Company had also obtained permission from the RBI for issue of 33,75,000 shares to the fourth respondent as a foreign collaborator. Accordingly, the fourth respondent was substituted in the place of the sixth respondent which had brought in a sum of Rs. 443.26 lakhs towards its contribution as seen from the certificates of Foreign Inward remittance and the relevant correspondence (Annexure R-6 - Series - Pages 18 - 33 in Vol.II). The Company made the allotment of shares to the petitioners and the fourth respondent at the Board meeting held on 30.05.2000. Without these funds the project could not have been completed by the Company. The Company had derived benefits by virtue of the impugned allotments in favour of the fourth respondent. In this connection, he referred to D. Suryanarayana Shastri v. Dasika Industrial Chemicals (P) Ltd. - (2002) 39 SCL 163 - to show that though the allotment was irregular, yet it was found that it was not oppressive in nature, but it was in the interest of the Company. In the present case, the fourth respondent had brought in Rs. 443.26 lakhs pursuant to the allotment made in his favour without which the school would have been closed and hence the allotment was in the interest of the Company. As the first petitioner never rendered Technical Services as Ontario agent, the Company was constrained to enter into a technical agreement with the sixth respondent with the permission of the SIA and accordingly the sixth respondent provided technical services to the Company (Annexure R-9 - Page 45 in Vol.II). The first petitioner was looking after the affairs of the Company till 1997 - 98. As the first petitioner could not run the school successfully the respondents 2 & 3 took over the management of the school. Moreover, the petitioners were stationed in Canada came to Bangalore quite a few occasions only after 1998. The Company sent notices to the petitioners for the Board meetings and the general meetings at their addresses in India. The petitioners were not associated with the management of the school and never took any interest in managing the school except corresponding with the seventh respondent for consultancy fees and other fund requirements without complaining about non-receipt of the notices for Board or general meetings as revealed from the E-Mail messages sent by the first petitioner to the Company (Annexure R-4 Series - Page 5-16 in Vol.II). The petitioners had attended quite a few meetings of the Board and never attended any annual general meeting but initiated civil & criminal proceedings against the respondents. In these circumstances, according to Shri Raghavan, the petitioners are not entitled to claim any relief under Section 397 & 398 in support of which he relied on Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Estate (Pvt.) Ltd. - (1991) 51 CC 211 - to show that the relief under Sections 397 and 398 is an equitable relief which is entirely left to the discretion of the Court. The question of good faith has to be tested by the conduct of the petitioners as reflected not only in the proceedings before this court but also in the parallel proceedings in the civil court in other civil litigations in other courts. The Company had convened the Board meetings periodically and adopted the accounts from time to time as borne out by the Minutes of the Board meetings held on 01.08.1997, 01.09.1998, 05.05.1999, 19.08.2000 and on 09.07.2001 (R-7 series Pages 34-42 in Vol.II). The petitioners never participated in these meetings in spite of the notices sent to them. The annual general meetings convened in September 2000 and 2001 were adjourned for want of quorum on account of the absence of the petitioners as seen from the minutes of the meetings (R-8, series - Pages 43-44 in Vol.II). The petitioners never complained with regard to convening of the Board meetings or annual general meetings prior to initiating the proceedings before the CLB. The respondents never utilized the funds of the Company for purchase of jewellery for the owns use. According to the respondents they had availed monetary benefits periodically from the Company to the extent of several lakhs details of which are furnished in Pages 47-61 in Vol.II. The amount of Rs. 53 lakhs invested in the partnership entered into between the respondents 2 & 3 with the eighth respondent is neither prohibited nor violative of the stipulations of the SIA approval. Shri Raghavan, therefore, sought for dismissal of the petition.
8. Shri Harikrishnan in his rejoinder pointed out that the reply notice dated 25.02.2002 (Page 7 of Vol.IV) does not amount to admission on the part of the petitioners. The notice only points out that respondent Nos. 2 & 3 are not the majority shareholders and the majority shares are held by the fourth respondent. This is reply given to the notice given by the petitioners at page 1 of Vol.IV. The entire reply notice has to be considered by the Bench and not stray sentences thereof. At any cost, this would not amount to admission on the part of the petitioners. He further referred to the written statement (Page 49 in Vol.IV) filed by the petitioners in OS No. 15334 of 2002 filed by the respondents, wherein the increase in the authorized capital has been challenged. The written statement does not show that the fourth respondent was holding 90 per cent. It dos not amount to consent for increasing the authorized capital and the fourth respondent holding 90 per cent of equity shares in the Company. The capital structure and holding in the Company are disputed in the petition. Otherwise, the relief claimed in the petition is to set aside the impugned allotments becomes meaningless. Therefore, there are no admissions on the part of the petitioners for the increase in the authorized capital and the allotment of the share capital. The petitioners are entitled to impugn the allotments, when the purported fraud came to light subsequently, upon which the parties are entitled to retreat any statement made in the reply notice dated 25.02.2002.
9. We have considered the pleadings and arguments of learned senior Counsel for the petitioners as well as the respondents. The alleged acts of oppression and mismanagement in the affairs of the Company relate to the following:-
* non-holding of the annual general meetings or meetings of the Board of Directors of the Company and non-sending of notices for such meetings to the petitioners.
* illegal substitution of the parties to the JVA by nominating the fourth respondent in the place of the sixth respondent to invest funds in the company.
* the unauthorized increase of the authorized capital from Rs. 5 lakhs to Rs. 4 crores.
* illegal allotment of the impugned shares in favour of the fourth respondent.
* illegal appointment of the sixth respondent as the technical services provider by virtue of a Technical Services Agreement dated 19.06.1999 on payment of fee of US $ 75,000 per year; siphoning of foreign exchange thereof.
* running of the school by the second and third respondents in collusion with the seventh respondent in violation of the JVA.
* illegal appointment of the fifth respondent and GD as the consultants by means of entering into Consultancy Services Agreement on monthly remuneration of US $ 5,275 so as to siphon of funds of the Company.
* the unauthorized investment to the tune of Rs. 53 lakhs in Siddartha Canadian School, Hyderabad.
It is on record that the first petitioner being an academician and educationalist was instrumental in corporating the Company and establishing the school. The first petitioner, in the course of initiating the steps for establishing the school had incorporated the Company on 22.03.1996 and converted the Company into a joint venture company by entering into a Joint Venture Agreement on 10.06.1998 with the sixth respondent, a body corporate owned by respondents 2 & 5 for the purposes of establishing and operating the school in Bangalore. The JVA stipulates, inter-alia, that the sixth respondent should hold 90 per cent of the equity shares of the Company and that the first petitioner should hold 10 per cent of the equity shares. The JVA further provides that the Board of Directors of the Company should comprise of the first petitioner and the respondents 3 & 5 and further that the third respondent should be the Chairman of the Company. It is observed that the second and third respondents were at all times since inception of the Company were responsible for the day-to-day affairs and management of the Company. The first petitioner domiciled at Canada could not attend to the day-to-day affairs of the Company, as evident from the complaint (page 210 in Vol.I) lodged before the Court of Additional Chief Metropolitan Magistrate at Bangalore Though the first petitioner has been complaining of non-receipt of the notices for annual general meetings or the Board meetings, we do not find any material making such allegations against the Company since the execution of the JVA. The fist petitioner had for the first time leveled the charges of non-receipt of the notices for the annual general meetings or Board meetings in his complaint lodged before the Chief Metropolitan Magistrate at Bangalore on 28.02.2002. Though the first petitioner has contended in the civil suit OS No. 16764/2001 in the year 2001 before the City Civil Judge at Bangalore that the respondents had indulged in the (SIC) irregularities and the misappropriation of funds of the Company, he failed to take the plea of non-sending of notices to the annual general meetings and Board meetings of the Company. We find from the e-mail exchanged between the parties during September 2001 (Pages 5 to 16 of Vol.II), the first petitioner was requesting for funds towards his technical services. The correspondence exchanged between the parties, the bank statement and the payment vouchers executed by the first respondent (Pages 47 to 61 of Vol.II) show that the first petitioner was making requests for the funds from the respondents and received the amounts on various occasions during the period from April 1999 to September 2001. But, the first petitioner never complained of non-receipt of the notices for the meetings of the Company It is rather surprising to observe that though respondents 2 & 5 were running the school since the year 1998, the first petitioner had kept quiet for all thee years till November, 2001. While the first petitioner could claim his professional fees, he never demanded either convening of the annual general meetings or board meetings or initiating steps for statutory compliances including adoption of accounts of the Company for all these years. Therefore, the plea of the first petitioner that he had not received notices for any of the meetings and that no meetings were convened by the respondents are ill-conceived and must fail. The grievances of the petitioners in regard to substitution of the fourth respondent to be the foreign collaborator in the place of the sixth respondent have to be considered in the light of the JVA entered into between the first petitioner and the sixth respondent. Clause 3.3 of the JVA stipulates that the sixth respondent should hold 90 per cent of the equity shares of the Company and the first petitioner should hold the remaining 10 per cent of the equity shares. The relevant portion of Clause 3.3 throwing light on the issue of the shareholding of the parties to the JVA runs as under:-
"The parties agree that the portion of the shares to be allotted to any party hereto may at the discretion of such party be allotted to any of its affiliates, but subject to obtaining the necessary approval, if any, of all the relevant and requisite authorities including the Secretariat of Industrial Approvals, Foreign Investment Promotion Board and the Reserve Bank of India. In accordance with these agreements, any one or more of its affiliates may subscribe for the portion of shares allotted to each party provided that any such affiliate or affiliates shall designate that party as its sole representative to exercise all its rights over such shares..."
It is, therefore, abundantly clear that the shares of the Company allotted to either of the parties to the JVA may at the discretion of such party be allotted to any of its affiliates, of course, subject to the approval of the Competent Authority. In this connection, it is relevant to note that in terms of definition 1.2 of the JVA, there should be an Annexure A indicating the names of companies of EDUCAN but this Annexure is not disclosed in the petition. It is obvious from the JVA that for any such allotment by any party to the JVA in favour of the affiliates, concurrence of the other party is not contemplated. It is on record that the SIA by its communication dated 12.09.1996 (Page 80 of Petition) conveyed its approval in favour of the Company for foreign collaboration subject to certain terms and conditions. Accordingly, the sixth respondent should be the foreign collaborator of the Company, who should hold 90 per cent amounting to Rs. 337.50 lakhs in the paid-up capital of Rs. 375 lakhs of the Company. The Company by its letter dated 07.05.1999 (Page 105 of Petition) made an application before the SIA for substitution of the fourth respondent in the place of the sixth respondent to invest in the Company. The Company had categorically stated that as per the JVA the shares were to be allotted to the sixth respondent or its affiliates. The fourth respondent, an affiliate of the sixth respondent, the fact of which is denied by the petitioners, made investments aggregating Rs. 443.26 lakhs in the project enabling the Company to operate the school at Bangalore. In the circumstances, the Company had sought permission to allot 33,75,000 shares of Rs. 10/- each amounting to Rs. 3,37,50,000 in favour of the fourth respondent and returned Rs. 68.26 lakhs the excess sum of over above the original approved amount of foreign equity of Rs. 375 lakhs (Rs. 443.26 lakhs minus Rs. 375.00 lakhs = Rs. 68.26 lakhs) that was already brought in by the fourth respondent. The Company had further sought to engage the sixth respondent to provide technical services to run the school on payment of fee of US $ 75,000 per annum for a period of two years. The SIA by its communication dated 14.06.1999 (Pages 108 & 109 of Petition) had conveyed its approval for the amendments proposed by the Company on the premises that the fourth respondent is an affiliate of the sixth respondent. Admittedly the sixth respondent is held by respondent Nos. 2 and 5 as borne out by para 6(c) of the Petition. The telefax dated 21.05.2002 (Page 46 in Vol.II) sent by the tenth respondent shows that the fourth respondent is wholly owned by the second respondent, in which case the plea of the petitioners that the fourth respondent is not an affiliate of the sixth respondent must fail. Against this background, categorical admissions made by the first petitioner in the legal notice dated 25.02.2002, written statement and counter statement filed in OS No. 15334 of 2002 before the Court of City Civil Judge at Bangalore, become quite relevant for consideration. (Page 7, 35 & 52 of Vol.IV). The first petitioner has taken the plea in the written statement and counter statement that the entire funding of the school has come by way of credit from V.P. Bank, Liechtenstein and the same is payable to the said Bank by the fourth respondent. It is also seen from the legal notice dated 25.02.202 sent by the first petitioner that 90 per cent of the shareholding of the Company is held by the fourth respondent and that the remaining 10 per cent is held by the petitioners. Again, the first petitioner at para 14 of the said notice has contended that the majority shares are held by the fourth respondent. The statements of the first petitioner are categorical and unequivocal. The petitioners have consciously averred in the rejoinder (Page 12) that the funds that were received by the Company were to be remitted on behalf of the sixth respondent and that the fourth respondent had no role to play in the remittances. Further the first petitioner in his letter addressed to the 10th respondent (Page 80 of Vol.II) has unequivocally confirmed that the fourth respondent is a shareholder of the Company. It is, therefore, clear that the funds were brought and utilized by the Company for running the school. As far as increasing the authorized capital of the Company is concerned, the admitted fact is that at the time of incorporation of the Company, the authorized capital was Rs. 5 lakhs and the entire paid up capital of Rs. 200 was held by the petitioners. When the petitioners themselves have asserted in the petition that they were holding 3,75,000 shares of Rs. 10/- each consisting 10% of the share capital, they should have been aware that they could not hold as many shares without increase in the authorised capital. In these circumstances, the petitioners are estopped from stating that the authorized capital was not validly increased and that the allotments were not made in favour of the fourth respondent as rightly pointed out by leaned Senior Counsel for the respondents. Moreover, in the absence of any increase in the Authorised Share Capital and allotment of the impugned shares, the petitioners would not be entitled 10% of the paid-up capital of the Company. But for the funds brought in by the fourth respondent, the school could not have become operational and the first petitioner enjoyed the benefit of technical services fees for the period from April 1999 to September 2001. In the light of the admissions of the petitioners, the lapses pointed by Shri Harikrishnan, Senior counsel for the petitioners in regard to the certificates of foreign Inward remittance (Pages 19-29 in Vol.II) and the purported letter dated 08.6.2000 (Page 31 in Vol.II) do not have any impact on the proceedings. The SIA after considering the application made by the Company for substitution of the fourth respondent in the place of the sixth respondent including the foreign remittances made by the fourth respondent covered by the relevant certificates of foreign inward remittance accorded its approval for substitution and allotment of the shares in favour of the fourth respondent. We further observe that pursuant to the approval granted by the SIA for utilizing the services of the sixth respondent as technical collaborator, the Company had entered into Technical Services Agreement with the sixth respondent agreeing to pay annual fee of US $ 75,000. It is not, therefore, in violation of the approval of SIA; and the charges leveled against the respondents are devoid of merits. The allegations in regard to appointment of the consultants; payment of fees to such consultants and the investment of Rs. 53 lakhs made in a new School project at Hyderabad, we are of the view, that they are left to the wisdom of the Board of Directors of the Company. The petitioners have neither substantiated any loss, if any, sustained on the account of such acts of the Company. In regard to the plea that the school being run by the teachers without proper qualification, it is observed from the inspection report of the Ministry of Education dated 05.13.2002 (Page 9 in Vol.X) that the school is progressing well with the implementation of the new Ontario curriculum and is addressing the needs of the teaching staff through its professional development programme for staff. The mere fact that respondents NO. 2 & 3 are responsible for closure of the Hong Kong cannot be a valid ground for grant of any relief in the present petition. The first petitioner, in our view, aggrieved by the act of the Company in having entered into a Technical Services Agreement with the sixth respondent on payment of hefty royalty, ignoring the technical services provided by the first petitioner, perhaps has been motivated to initiate the present petition. Therefore, we do not find any merit in the petition warranting any relief as claimed in CP 23 of 2002. Accordingly, we are not inclined to grant any relief in favour of the petitioners and all the interim orders stand vacated. Consequently, the reliefs claimed by the petitioners in CP 7 of 2002 for rectification of the register of members of the Company by deleting the name of the fourth respondent in respect of the impugned shares is also declined. Even though we have declined to grant the prayer sought for by the petitioner in CP 23 of 2002, yet considering the fact that continued disputes between the parties would affect the proper functioning of an educational institution, we are of the view that the petitioner being a minority shareholder should go out of the Company on receipt of fair consideration for their shares. Even though the respondents have contended that no consideration was paid by the petitioners for these shares, yet since they are shown as members in respect of these shares, the entitlement to receive consideration for these shares cannot be denied by the respondents. Accordingly, we give option to the petitioner to go out of the Company on receipt of the face value of the shares. In case the petitioners are willing they should issue a notice in writing to the Company/fourth respondent within 30 days from the date of receipt of the orders offering to sell their shares at face value. Once such a notice is issued, the same will be binding on fourth respondent who is at liberty to purchase the shares either in its own name or in the names of any of its nominees. The consideration for these shares should be paid to the petitioners within a month from the date of receipt of notice of the petitioners. As far as CP 223/186/SRB/2002 is concerned now that we have held that the allotment of shares to the fourth respondent was in order and that we have given option to the petitioner to go out of the Company, the Company is at liberty to hold the extraordinary general meeting, if necessary with one member present. All other prayers made in this petition CP 223/2002 are allowed.
10. The petitions are disposed of in the above terms with no order as to cost.