Company Law Board
Ador-Samia Ltd. And Ors. vs Indocan Engineering Systems Ltd. And ... on 17 September, 1999
Equivalent citations: [2000]100COMPCAS370(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. The main grievances in the petition filed under Section 397/398 of the Companies Act, 1956 ("the Act"), alleging acts of oppression and mismanagement in the affairs of Indocan Engineering Systems Limited ("the company") are that the respondents had fraudulently induced the petitioners to invest a huge amount of money in purchasing the shares of the company and that no board meetings are convened by the respondents and that whenever board meetings are held, no notices are issued to the nominee directors on the ground that they ceased to be the directors of the company. On the basis of these allegations, the petitioners have sought for appointment of an administrator, for taking action against respondents Nos. 1 to 5 for falsification of the books of account with an intent to defraud, for a declaration that during the subsistence of the MoU and the shareholders' agreement, the petitioners are entitled to have three nominees on the board of the company and for removal of A. K. Bohre and Co. as auditors of the company.
2. Shri Dwarkadas, senior advocate appearing for the petitioner, submitted that the company is a closely held deemed public company and the petitioners form part of Ador group of companies. The company is dealing in the business of environmental engineering and with a view to enlarging the business through suitable strategic alliance, the respondents entered into an MoU with the petitioners on July G, 1997. As per the MoU, the petitioners were to acquire 60 per cent. shares in the company from the respondents on a value to be decided by the parties on the basis of due diligence report and valuation report to be prepared by Dalai and Shah. On receipt of the valuation report, the petitioners entered into a shareholders' agreement on August 29, 1997, by which 60 per cent. shares were to be purchased on a consideration of Rs. 270 per share totalling to Rs. 2.3 crores. Accordingly, the petitioner purchased 18 per cent. shares from respondents Nos. 3 to 5, for a total consideration of Rs. 84 lakhs. The balance of 42 per cent. was to be purchased from respondent No. 2, which is a foreign company after complying with the RBI regulations, etc. The petitioners also invested a sum of Rs. 2.15 crores as intercorporate deposits to be used for working capital requirements. In board meetings held in August and September, 1997, three nominees of the petitioners were appointed as directors. After joining the board, the nominees of the petitioners found out that the financial position of the company was not what was represented by the respondents to the petitioners before they joined the company. The company had an accumulated loss of Rs. 9.42 crores as on September 30, 1997. Even the auditors of the company, Bhora, had admitted that the loss was to the tune of Rs. 7 crores on a turnover of Rs.3.5 crores. Thus, he submitted that by giving wrong information/particulars, the petitioners were induced to agree to purchase the shares at Rs. 270 per share. He further submitted that there has been no board meeting after October, 1997, and with a view to oust the nominee directors, the respondents engineered to have an extraordinary general meeting convened to remove the nominee directors. The petitioners filed a suit in the Bombay High Court on October 24, 1997, challenging the convening of the said meeting and obtained an injunction. He also submitted that without notice to the petitioners' nominees, in a board meeting, the board had adopted the accounts of the company and had also convened an annual general meeting on December 3, 1998, to adopt the accounts. In the notice for the meeting it is stated that the nominees of the petitioners had ceased to be directors of the company without elaborating as to how they ceased to be the directors. According to him, the company has taken a stand that the nominees of the petitioners were appointed only as additional directors and as such they could continue in office only up to the immediate next date of the annual general meeting and that since the annual general meeting was not held by September 30, 1998, they had ceased to be in office. He submitted that the action of the respondents to convene the extraordinary general meeting and to take a stand that the nominees of the petitioners had ceased to be directors is in violation of the undertaking given by the respondents before the Company Law Board and recorded in its order dated January 12, 1998. He submitted that the Company Law Board had already restrained the company from holding the annual general meeting till the disposal of the petition. According to him, in terms of Section 166 of the Act, the annual general meeting should be held once in a calendar year and the gap between two annual general meetings should not be more than 15 months and, therefore, the last date of holding the annual general meeting would be December 31, 1998, and, therefore, the stand of the company that the nominee directors had ceased to be directors by September 30, 1998, is not correct. For the proposition, he relied on Krishnaprasad Jwaladutt Pilani v. Colaba Land and Mills Co. Ltd. [ 1959] 29 Comp Cas 273 ; AIR 1960 Bom 312, B.N. Viswanathan v. Tiffin's Barytes Asbestos and Paints Ltd. [1953] 23 Comp Cas 29 ; AIR 1953 Mad 520 and Hindusthan Co-operative Insurance Society Ltd., In re [1961] 31 Comp Cas 193 (Cal). Therefore, he submitted that the Company Law Board should declare that the nominee directors of the petitioners continue as directors on the board with further directions that they will continue to be directors as long as the investments made by the petitioners continue with the company especially when as per the MoU, the petitioners were to conduct the affairs of the company with the respondents on the principles of partnership. Relying on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 (SC) he submitted that even assuming that the petitioners have not been able to establish oppression, yet, on equitable grounds, taking into consideration the circumstances in which the petitioners became the shareholders of the company the reliefs sought for should be granted. He further submitted that the complaints made in the petition not only fall within the provisions of Section 397 but also under Section 398 as the mismanagement in the affairs of the company is crystal clear.
3. Shri Khaitan Parikh, advocate for the respondents, submitted that the petition is not maintainable as the main allegation in the petition is that the respondents have played a fraud on the petitioners before they became the shareholders of the company. They became shareholders only in September, 1997, and the allegation of fraudulent maintenance of accounts relates to a period before they became shareholders, Further, the petitioners have already filed a suit in the Bombay High Court making similar allegations as in the petition. In fact, in that suit, the petitioners have sought for a decree for cancellation of the MoU and the shareholders' agreement and also for the repayment of Rs. 2.99 crores invested by them in shares and also in the form of intercorporate deposits together with interest. They have already obtained certain interim orders in that suit. Therefore, he submitted that the petitioners are pursuing parallel proceedings which should not be permitted. According to him, if the Bombay High Court passes a decree in terms of the prayers made therein, the petitioners would no longer continue as shareholders. Even the allegation relating to accounts relates to an earlier period and is a completed and past act which cannot be questioned in a Section 397/398 petition. He also submitted that the petitioners have not established that the company should be wound up on just and equitable grounds. Further according to him, unless otherwise, there are continuous acts of alleged oppression, the petition cannot be maintained. For this proposition, he relied on Palghat Exports Private Ltd. v. T. V. Chandran [1994] 79 Comp Cas 213 (Ker). The only purpose of filing the petition by the petitioners is to put pressure on the respondents to pay back whatever money the petitioners have invested in the company. In the suit in Bombay, one of the reliefs sought for is that the nominee directors of the petitioners should continue. The petitioners have also filed a criminal complaint for alleged falsification of accounts and they have also complained to the Institute of Chartered Accountants of India against the auditors of the company. He further submitted that after the alleged detection of the alleged fraud, the petitioners wanted reduction in the price of the share which was not acceptable to the respondents and in view of this, proceedings by way of a suit and the present petition were initiated by the petitioners. In other words, he submitted that this petition is for an oblique motive to put pressure on the respondents to refund the money invested by the petitioners. The best course of action would be to refer the disputes to an arbitrator to which the petitioners are not willing.
4. Dealing with the merits of the case, learned counsel submitted that at the time when Dalai and Shah did due diligence and furnished the report on the value of shares, the company had furnished all the information that the valuers required and the company is not guilty of suppression of any material information from the valuers. Referring to exhibit 4 to the reply, learned counsel submitted that the petitioners themselves had prepared a complete list of what were all to be looked into before arriving at the price and a perusal of the same would show that even those items which the petitioners now allege were suppressed or manipulated find place in that list. In other words, according to learned counsel, the petitioners were fully convinced that a complete checking of the accounts and related matters had been done before voluntarily agreeing to the price of Rs. 270 per share. Thus, learned counsel submitted that the allegation of the petitioners that they have been taken for a ride cannot be sustained. Even otherwise, he submitted that the entire matter is before the High Court and as such the Company Law Board should not adjudicate on this issue.
5. In regard to directorship, he submitted that the proposed removal of the nominees of the petitioners as directors in the extraordinary general meeting was not considered since the Bombay High Court restrained the company from holding the said meeting. Since, these directors were appointed only as additional directors, they could hold office only up to the date of the next annual general meeting. Since the next annual general meeting could not be convened on the due date that is by September 30, 1998, in terms of Section 210, by operation of law, they ceased to be directors of the company in terms of Section 260 of the Act. He further submitted that directorial complaints cannot be agitated in a Section 397 petition. He also pointed out that the petitioners were entitled to have three directors only on the understanding that the petitioners would acquire 60 per cent. shares in the company. Since so far they have acquired only 18 per cent. shares they are not entitled to have any representation on the board. He also pointed out that in the suit they have asked for cancelling the MoU and the shareholders' agreement, while before the Company Law Board they are seeking implementation of the agreement, which should not be allowed.
6. We have considered the pleadings and arguments of counsel. Before dealing with the allegation, it is necessary to note that a number of attempts were made by us to bring about an amicable settlement between the parties. In our order dated June 22, 1998, we suggested that the money invested by the petitioners be refunded, over a period of time. While this suggestion was acceptable to the petitioner, the respondents submitted a different proposal claiming therein certain damages against the petitioners or in the alternative desired that the disputes be referred to arbitration. This was not acceptable to the petitioners and as such the compromise efforts failed.
7. The main grievance of the petitioners is that they were induced to purchase the shares of the company on the basis of incomplete/wrong information relating to the financial position of the company as well as the projection for future when Dalai and Shah did due diligence and prepared a valuation report on that basis. Various references were made to the documents annexed with the petition and other applications made by the petitioners to substantiate this allegation. We are not elaborately dealing with this issue for two reasons. One is that the petitioners have already filed a civil suit prior in time in the High Court of Bombay seeking a decree for cancelling the MoU and the shareholders' agreement and also claiming the repayment of all their investments in the company together with interest. The other is that in a Section 397 petition, the petitioners have to allege acts of oppression in their capacity as shareholders. Whatever transpired before they became shareholders qua the company and the directors cannot be agitated in such a petition. Counsel for the petitioners repeatedly made a plea that if their investment is refunded, they would have no cause of action against the respondents. We, with a view to settle the dispute, tried in this regard but did not succeed. We cannot, by an order direct the respondents to refund the investment made by the petitioners as they have already moved the Bombay High Court wherein they have already filed a suit, prior in time to the filing of this petition, for refund of their investment. Further, we also note that the petitioners have already initiated criminal proceedings against the respondents in regard to the dishonour of cheques given by the company towards repayment of the intercorporate loans. Accordingly, we do not propose to examine this issue in detail and give our findings.
8. The other allegation relates to the nominee directors. Counsel for the respondents submitted that directorial complaints cannot be agitated in a Section 397 petition. Even though, there is substance in the submissions in this regard, the same cannot hold good in all circumstances. We have held, in many cases, that directorial complaints can be entertained in a Section 397 petition in cases of family companies and companies in the guise of quasi-partnership. Further, on equitable considerations also, depending on the facts of a case, directorial complaints can be entertained. In the present case, the company is not a family company. Counsel for the petitioners urged that we should consider this company as a company in the nature of a quasi-partnership in view of the MoU and the shareholders' agreement and subsequent induction of the nominees of the petitioners as directors on the board. May be, there is some force in his arguments, but, considering the facts that neither the MoU nor the shareholders' agreement has been fully acted upon by the parties, we are not in a position to accept his arguments, as an act of oppression under Section 397. We note that this petition is a composite petition both under Sections 397 and 398. In a Section 398 petition, if duly appointed directors complain that they are denied their right to function as directors, then, we are of the view that the same could be considered as acts of mismanagement in the affairs of the company and as such we treat this directorial complaint under Section 398. It is on record that respondent No. 8 was appointed as an executive director in the board meeting held on August 29, 1997, and respondents Nos. 6 and 7 as additional directors in the board meeting held on September 11, 1997. After the disputes started, there was an attempt to remove the nominee directors in an extraordinary general meeting convened on October 25, 1997, which could not be held due to the restraint orders passed by the Bombay High Court. Apprehending that they may be removed later, the petitioners sought for an undertaking from the respondents that status quo relating to the composition of the board would be maintained and this undertaking was recorded in our order dated January 12, 1998. When the notice convening the annual general meeting on December 3, 1998, was received by the petitioners wherein there were proposals for appointment of directors in the place of nominee directors on account of their having ceased as directors, the petitioners once again approached the Bombay High court alleging that the respondents had violated the orders of the Bombay High Court and the Company Law Board regarding the composition of the board of directors. The Bombay High Court disposed of this application on December 23, 1998, without expressing any opinion on the contentions of the parties. In the meanwhile we also passed an order on November 26, 1998, directing that the proposed annual general meeting convened on December 3, 1998, shall be deferred till the disposal of the petition. Thus, the attempt of the respondents has been to somehow or other oust the nominee directors of the petitioners after their appointment as additional directors and, therefore, the petitioners having invested substantial amount in the company, do have a rightful grievance in this regard.
9. Section 260 stipulates that additional directors shall hold office only up to the date of the next annual general meeting of the company. The admitted position is the nominees of the petitioners were appointed as additional directors in August/September, 1997, and as such they could hold office as directors only, up to the end of the next annual general meeting. In so far as Section 260 is concerned, there are many decisions of the various High Courts that the tenure of appointment would end on the last date on which an annual .general meeting should have been statutorily held. We are not elaborating these decisions as neither of the counsel contested this legal position even though they differed in their interpretation as to what should be the last date of holding the annual general meeting. The annual general meeting for 1996-97, was held on August 29, 1997. Therefore, the nominees could continue as directors up to the last day on which the annual general meeting for 1997-98 was to be held. In the facts of this case, the issue for our consideration is what is the last date by which the annual general meeting for 1997-98 should have been held. Counsel for the petitioners relied on the provisions of Section 166 and counsel for the respondents on the provisions of Section 210 to advance their respective stand.
10. Section 166(1) reads as follows : "Every company shall in each year hold in addition to any other meetings a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than 15 months shall elapse between the date of one annual general meeting of a company and that of the next."
11. Section 210 reads as follows : "(1) At every annual general meeting of a company held in pursuance of Section 166, the board of directors of a company shall lay before the company (a) a balance-sheet as at the end of the period specified in Sub-section (3) ; and (b) a profit and loss account for that period. . . . (3). The profit and loss account shall relate-- . . . (b) in the case of any subsequent annual general meeting of the company, to the period beginning with the day immediately after the period for which the account was last submitted and ending with a day which shall not precede the day of the meeting by more than six months, or in cases where an extension of time has been granted for holding the meeting under the second proviso to Sub-section (1) of Section 166, by more than six months and the extension so granted."
12. Section 166 of the Act deals with annual general meetings of companies, According to this section, every company should hold an annual general meeting in each year and the gap between two annual general meetings should not be more than 15 months. The normal businesses to be transacted in an annual general meeting have been elaborated in other sections of the Act. They are : adoption of accounts as per Section 210, declaration of dividend as per Section 205, appointment of directors in the place of retiring directors as per Section 256, appointment of auditors in terms of Section 224. Section 210 stipulates the laying of the balance-sheet and profit and loss account in an annual general meeting within six months from the closure of the accounting period. According to counsel for the respondents, since the accounts of the company relate to the period ending March 31, 1998, the annual general meeting should have been held by September 30, 1998, in terms of Section 210, and since the same was not held, the nominee directors of the company ceased to be directors in terms of Section 260 of the Act which stipulates that the additional directors shall -hold office only up to the date of the next annual general meeting. Therefore, according to him, by operation of law they ceased to be directors and not on account of any action taken by the respondents. According to counsel for the petitioners, the last date for holding the annual general meeting in terms of Section 166 was December 31, 1998, and, therefore, the respondents' stand in the notice for the annual general meeting that the nominees of the petitioners had ceased to be directors is not correct. He also relied on certain case law as indicated as a part of his arguments. According to us, Section 166 has to be read independent of Section 210. A harmonious construction would indicate that as soon as the annual accounts are ready, they should be laid before the annual general meeting to be convened within six months from the last date of the accounting period. In case the accounts are not ready, even then the annual general meeting has to be held in terms of Section 166. In other words, each section imposes independent obligations on the company and the time limit fixed in Section 210 cannot override the time limit fixed in Section 166 as is evident from the provisions of Section 210 itself. Section 210(1) speaks of an annual general meeting convened in pursuance of the provisions of Section 166 and Section 210(3)(b) further says that the accounts could be laid later than six months if extension of time under the second proviso to Section 166(1) is granted by the Registrar of Companies to hold the annual general meeting. Therefore, for application of Section 260, the time limit fixed under Section 166 is alone relevant and not that of Section 210. Thus, the legal position is that a company could hold an annual general meeting even on the last day of a particular year, i.e., December 31, provided the gap between the earlier annual general meeting and the proposed annual general meeting does not exceed 15 months provided no extension has been granted by the Registrar of Companies, Viewing the present matter in this context, since the last annual general meeting was held on August 29, 1997, the next annual general meeting should have been held latest by November 30, 1998. Thus, the stand of both the counsel on the date by which the company should have held the meeting for application of the provisions of Section 260, is not founded on the correct position of law. Therefore, it was wrong on the part of the respondents to have taken the stand that the nominee directors had ceased to be directors of the company when they issued the notice for the annual general meeting to be convened on December 3, 1998. Obviously, the annual general meeting did not take place since we had directed the company to defer holding the annual general meeting till the disposal of the petition. This order was passed. This order was passed on November 26, 1998, which is three days prior to November 30, 1998, by which time the company should have held the annual general meeting in terms of Section 166. Since the legal requirement of holding the annual general meeting was deferred due to our directions, there is no default in holding the annual general meeting and as such the nominee directors will continue as directors till the annual general meeting for 1997-98, after we vacate the stay order, is held. Accordingly, we declare that respondents Nos. 6, 7 and 8 continue to be directors of the company and they will be entitled to attend all the board meetings with due notice to be sent by registered post along with agenda items at least seven days prior to holding of the meetings.
13. The petitioners have sought for a declaration that their nominees should continue as directors as long as their investment continues with the company. We are unable to make such a declaration inasmuch as the same is sought for on the basis of the MoU. This MoU gives the petitioners the right to have three nominee directors and we find that the foundation for this right is that they would hold 60 per cent. shares in the company. Normally, private agreements unless and otherwise, are made part of the articles are not binding on a company. However, in some cases the Company Law Board has taken a view that even if they do not form part of the articles, if the company had acted in terms of such agreements, then, the same is binding on the company in so far as those terms which have been acted upon by the company. In the present case, we find that the petitioners have not acquired 60 per cent. shares as per the MoU and whatever might be the reasons for not doing so, the foundation on which three nominee directors had been agreed upon, does not exist. In case other shareholders do not wish to approve the continuation of the nominee additional directors as directors in the annual general meeting, we cannot direct them to approve their appointment. By making a declaration as sought for by the petitioners, we would be allowing shareholders' holding 18 per cent. shares to control the company contrary to the principles of corporate democracy. Therefore, we are not in a position to consider the prayer of the petitioners that they should continue to hold the majority control on the board with three of their nominees, However, on equitable consideration, taking into account the circumstances under which the petitioners became shareholders and also the fact that they have invested substantial amount as intercorporate deposits to tide over the financial difficulties of the company, in case the nominee additional directors are not appointed as directors in the next annual general meeting, then, we direct that the petitioners will have the right to have one nominee as a director on the board of the company as long as they hold 18 per cent. shares in the company. This nominee will not be liable for retirement by rotation except that the petitioners will have the right to change the nominee.
14. Before we part with the order, we also note the submission of counsel that the Chief Justice of the Bombay High Court has appointed an arbitrator on an application made by the respondents in terms of Section 11 of the Arbitration and Conciliation Act, and that the special leave petition filed by the petitioners against this order, has been dismissed by the Supreme Court.
15. We dispose of this petition in the above terms. There shall be no order as to costs.