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A. Ravishankar Prasad, A. Sai ... vs Prasad Productions Private Limited And ... on 1 September, 2005

Equivalent citations: [2007]135COMPCAS416(CLB), [2006]71SCL83(CLB)

ORDER

K.K. Balu, Vice-Chairman

1. The petitioners constituting more than one-tenth of the total number of members of M/s Prasad Productions Private Limited ("the Company") have filed this company petition under Sections 235, 397, 398, Schedule XI read with Sections 402 and 403 of the Companies Act, 1956 ("the Act") alleging against the respondents, the following acts of oppression and mismanagement in the affairs of the Company:

• allotment of the rights shares to the respondent group in exclusion of the petitioners group;

• siphoning of the Company's revenue and misappropriation of its assets;

• non-accounting of "sale of raw silver" in the profit and loss account of the Company;

• non-reconciliation of raw-films sold and raw-films received from the customers;

• non-confirmation of balances from the debenture holders and creditors;

• failure to update the quantitative particulars and location of fixed assets and to carry out physical verification of all such fixed assets;

• write-off of huge amounts as bad debts;

• extending advances to the directors and other private companies, where the respondent-directors are interested as directors, in violation of the provisions of the Act;

• improper charging of depreciation on the assets without meeting the requirements of the Act; and • failure to insure precious and expensive equipments causing huge loss to the Company.

2. Shri Arvind P.Datar, learned Senior Counsel, while initiating his arguments submitted that the Company was promoted in the year 1956 by late L.V.Prasad to carry on the business of film production. L.V.Prasad had two sons, viz., (i) Ananda Rao, since deceased and survived by his wife, two sons and a daughter, who are the petitioners herein; and (ii) A.Ramesh, the second respondent and (iii) one daughter, viz., Gruha Lakshmi. The authorised capital of the Company prior to June, 2002 was Rs. 20,00,000/- divided into 2,00,000 equity shares of Rs. 100/- each and the paid-up capital of Rs. 15,00,000/- divided into 15,000 equity shares of Rs. 1007- fully paid-up, out of which 71.67% was subscribed by the respondents group and balance of 28.23% was held by the petitioners group. The authorised capital of the Company was increased from Rs. 20,00,000/- to Rs. 2,00,00,000/- at the annual general meeting held on 06.06.2002, enabling the Company to issue rights shares in favour of the existing shareholders. The Company, after giving effect to the increase in authorised capital offered the additional shares to all members including the petitioners. Accordingly, the petitioners received a letter dated 13.08.2002 individually from the Company requesting them to submit the application form for allotment of shares within 15 days of receipt of the offer letter; The petitioners submitted their duly filled in applications dated 19.08.2002 and further enclosed an authorisation letter from the second petitioner empowering the Company to debit her current account the requisite amount payable against 52,406 equity shares offered to the petitioners. These letters were handed over in person to the second respondent by the second petitioner, apart from sending the letters to the Company on 26.08.2002 under certificate of posting. When the letters are addressed and posted by certificate of posting, there is a presumption that the letters must have reached in due course the addressee, as held in M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd. . The presumption of the receipt of the letters under certificate of posting would differ from case to case depending upon the facts involved thereon as held in Jadabpore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. (1984) 55 CC 160 & Akbarali A. Kalvert v. Konkan Chemicals Pvt. Ltd. (1997) 88 CC 245. It is quite improbable in the present case that the petitioners would not have sent the consent letters under certificate of posting when they were to receive shares in the profit earning Company without any financial burden on them. However, the Company instead of allotting the additional shares to the petitioners, refunded the, total amount standing to the credit of the petitioner Nos. 2 & 4, without asking for it, as borne out by copies of the letters dated 20.03.2003 and 25.03.2003 and cheques dated 20.03.2003 for Rs. 1,25,20,931/- and Rs. 51,05,542/- respectively sent by the Company. There is no justification for the unilateral and sudden refund of the amounts in favour of the petitioners. In the meanwhile, the board of directors allotted 1,32,594 equity shares on 20.9.2002, to the respondents group, being their entitlement, against the credit balances lying in their account and further allotted on 29.03.2003 the additional shares earmarked for the petitioners in favour of the respondents group, with intention of reducing the respondents to a miniscule minority of 2.88% from 28.33%. originally held by them. This act of denying the rights shares to petitioners, while allotting the shares exclusively in favour of the respondents, apart from being malafide, is a clear act of oppression on the part of the respondents. The powers to issue shares given to the directors are fiduciary powers, which should not be exercised for gaining in any manner for themselves. The Supreme Court held in Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan that when powers of the board of directors are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the Company, the same cannot be upheld. The directors' acts should not only satisfy the test of bonafides, they should also be done with a proper motive. The Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (2005) 3 Comp LJ 385 (SC) while considering the duty of directors came to the conclusion that their duty to make full and honest disclosure to the shareholders, inter-alia, as regard to issue of additional shares is relatable to proper purpose. If the purpose is proper and the action of the director is bonafide, there is no legal requirement of making full and honest disclosure to the shareholders relating to issue of additional shares. However, the directors in instant matter failed to act bonafide and they owe a duty to the petitioners in respect of the additional shares. If further shares are issued to create a new majority or to convert a majority into a minority, or, such issue is made in a closely held company at the detriment of a part of the shareholders, then such futher issue of shares could be considered to be an act of oppression, as held in Deepak C. Shriram v. General Sales Limited (2001) 4 Comp LJ 450. This Board in Stridewell Leathers (P) Ltd. v. Shoe Specialities (P) Ltd. (1996) 1 Comp LJ 426 set aside the allotment of further shares since such allotment was found to be oppressive of the petitioners and in S.T. Ganapathy Mudaliar v. S.G. Pandurangan (1999) 1 Comp LJ 350 cancelled in a family company the allotment of additional shares made exclusively in favour of one group, though such allotment was found to be legal and valid, but oppressive to the other group of family members. The Calcutta High Court in Tea Brokers (P) Ltd. v. Hemendra Prosad Barooah (1998) 5 Comp LJ 463 (Cal) held that any single act done on one particular action, if the effect of such an act will be of a continuing nature and the member concerned i s deprived of his rights and privileges for all time to come in future, it would be construed that the affairs of the Company are being conducted in a manner oppressive to any member or members, as laid down in Section 397. The authorised capital was increased with the sole object of diverting funds of the Company to Prasad Media Corporation Ltd., which is managed by the third respondent to implement the IMAX Theatre Project at Hyderabad. The investment was by way of redeemable preference shares to the tune of over Rs. 15 crores, which could be redeemed, on successful implementation of the project by Prasad Media Corporation Ltd. It would have been beneficial to invest in equity shares of Prasad Media Corporation Ltd., as it would have been a permanent capital for the Company. The Company has further given counter guarantee to the tune of Rs. 54.50 crores for the loans extended to Prasad Media Corporation Ltd. by IDBI and Andhra Bank. These came to light on scrutiny of the annual report for the period ended 31-03-2003, which was placed at the annual general meeting held on 21-01-2004. If the project fails and the guarantee is invoked by the financial institution, the Company will be put to irreparable loss and hardship. Instead, if the IMAX Theatre Project succeeds, the entire profits will be reaped by the respondents 2 & 3 at the cost of the Company. The IMAX Theatre Project could have been put up by the Company with its huge financial reserves and substantial profits in terms of the Government order issued by Government of Andhra Pradesh, thereby availing depreciation of Rs. 15 crores in the year of commencement itself. There is no explanation from the respondents as to why Prasad Media Corporation Ltd. has been formed separately by the respondent Nos. 2 & 3, while the directors' report for the year ended 31-03-2001 of the Company indicates that the directors have floated a new company, namely, Prasad Media Corporation Ltd. This shows the ulterior motive of the respondents 2 & 3 in having hijacked the IMAX Theatre Project from the Company, which is not permissible under law. The Supreme Court of Delaware in Charles G.Guth and The Grace Company, Inc., of Delaware v. Loft, Incorporated 5A.2d 503; 1939 Del. LEXIS 13 : 23 Del. Ch.255 disapproved the acts of a director to capture the company for himself without investing any money of his own in the venture, but commandeered for his own benefits and advantage the money, resources and facilities of his corporation and the services of its officials. The Court further disapproved the thrusting the hazard upon the other while the director reaped the benefits. The Supreme Court of Canada in Canadian Aero Service Ltd. v. O'Malley et al 11 C.P.R. (2d) 206; 1973 C.P.R. LEXIS 231, while dealing with the fiduciary duty of a director held that he must be loyal, must act in good faith and avoid a conflict of duty and self-interest and disapproved the usurpation for himself the business opportunities of the Company. All profits earned by Prasad Media Corporation Ltd. must be made available to the Company, in view of violation of the provisions of Section 88 of the Indian Trust Act, 1802, by the respondents. The business which is being, carried on by Prasad Media Corporation Ltd., must be carried on in trust for the Company and further the assets pf Prasad Media Corporation Ltd. must belong to the Company in trust. Shri Datar learned Senior Counsel, enumerated several acts of mismanagement in the affairs of the Company as under:

The Company failed to convene the annual general meeting during the period between 1994 and 2000. The accounts for these seven years were considered by virtue of the court order at the annual general meetings held on a single day, viz., 17.07.2002. The petitioners had no occasion to verify the books of account, in absence of the annual general meetings being convened at the regular interval.

The Company did not account for sale of raw silver and raw film in the profit and loss account for a period of nine years from 1983 to 1992 and the sale proceeds were siphoned of by the respondents during all these years. The Company failed to reconcile the quantity of raw film sold or received from the customers for processing with the quantity of final processed film and wastage. The Company did not obtain confirmation of balances from the debtors and creditors, since they have already collected the amounts from the debtors. Thus, the outstanding balances due to the Company have already been realised, causing huge financial loss to the Company.

The Company failed to maintain a fixed assets register with an intention to suppress diversion of the assets of the Company. The fixed assets register has not been brought up-to-date. The respondents had removed many valuable machines and other assets of the Company and transferred them without any consideration to their own concerns, thereby creating resources for themselves.

The Company failed to collect its receivables promptly, but wrote off huge receivables as bad debts over a period of time, causing irreparable loss to the Company and its members.

The Company had appointed at the annual general meeting for the year ended 31.03.2000, the respondent Nos. 3 & 4 as the whole-time directors and the second respondent as the Managing Director without complying the provisions of the Act. The Company extended advances to its directors without satisfying the requirements of Section 295. The Company advanced monies to certain private companies and firms, wherein the directors of the Company are either directors or members. These advances are nothing but diversion of the Company's funds benefiting the respondents group. The respondents received commission on net profits and the remuneration drawn by the third respondent and other directors are without approval of the general body.

The Company has been charging depreciation on its assets at the rate prescribed under the Income Tax, ignoring the provisions of Section 205 and Section 350 read with schedule XIV of the Act and also the Accounting Standards 6 & 10.

The Company failed to insure, inter-alia, its expensive equipments. During the year 1993-94, several of its precious equipments got destroyed on account of a major fire in the studio premises of the Company. The non-insurance of these assets resulted in losses exceeding Rs. 2 crores, which should be at present equivalent to Rs. 10 crores. The above suspicious circumstances existing in the affairs of the Company would clearly make out a case for investigation into, the affairs of the Company under Section 237(b) of Act. These acts of mismanagement need not be proved for the purpose of Section 237(b) as held in Aditya Sharda v. Rangoli Texdye Private Limited (2005) 123 CC390. This Board in Chandrika Prasad Sinha v. Bata India Ltd. (1997) 88 CC 81 held that by virtue of Section 237(b), it is a suo-motu power by which the CLB is to form an opinion as to whether there are circumstances which suggest the need for a. deeper probe into the affairs of a company on the information available before it. The limited role of a petitioner under Section 237(b) is to bring the relevant information containing the circumstances, which may suggest the CLB to form an opinion whether an investigation is warranted. The objection that the petitioner has not come with clean hands is not relevant and the CLB is not concerned with the conduct of the petitioner in the exercise of this jurisdiction, but with the relevance of the information placed before it. In the matter of Incab Industries Limited -(1997) 1 Comp LJ 156, the CLB ordered for an investigation into the affairs of the company on finding that it blocked substantial funds in another company when the main object is not investment and diverted the project money to various bodies unincorporated etc. The directors are guilty of fraud, misfeasance and mis-conduct towards the Company and its members. Therefore, the CLB has adequate powers to order for an investigation under Section 235, despite the petitioners do not have ten per cent shareholding of the Company. Furthermore, the petitioners have sought by way of an interim prayer for appointment of a chartered accountant to investigate the accounts, apart from one of the main prayers to surcharge the respondents based on the auditor's report. Consequently, the CLB, invoking its jurisdiction under Section 402 and 403 can pass appropriate orders for effectively bringing back the diverted funds to the Company.

3. Shri Datar, learned Senior Counsel, while arguing the company application for impleadment of the proposed respondent Nos. 6 & 7 pointed out that the directors' report dated 31.10.2001 forming part of the annual report for the year 2000-2001 clearly indicates that the Company successfully participated in the competitive bid for establishing the IMAX Theatre Project floated by the Government of Andhra Pradesh and further that the Company's directors have floated a new company, viz., Prasad Media Corporation Ltd. for implementing the project. While the Government of Andhra Pradesh by a G.O. dated 19.10.2000 awarded the IMAX Theatre Project in favour of the Company, subject to certain terms and conditions stipulated therein, the IMAX Theatre Project has been executed by Prasad Media Corporation Ltd. Prasad Media Corporation Ltd., is promoted exclusively by the respondent Nos. 2 & 3, making use of the funds and counter guarantee of the Company, which would amount to siphoning of the Company's funds. This categorically indicates that the profits which may be generated from the IMAX Theatre Project should go to the Company, failure of which, the petitioners are deprived of 28% of the earnings from Prasad Media Corporation Ltd.. The respondents have not chosen to explain as to how the IMAX Theatre Project came to be implemented by Prasad media Corporation Limited, especially when the Government of Andhra Pradesh awarded the project in favour of the Company. The annual report for the year ended 31.03.2001 discloses, inter-alia, reserves and surplus of an aggregate sum of Rs. 44.66 crores, cash and bank balances of Rs. 1.08 crores and profits of Rs. 23.85 crores. Thus, the Company is capable of implementing the IMAX Theatre Project. The investments made in Prasad Media Corporation Ltd. are reflected in the annual report of the Company for the year ended 31.03.2003, copy of which was available with the petitioners only in June, 2003 and there was no occasion for the petitioners to have knowledge about the investments made in Prasad Media Corporation Ltd., while filing the company petition in May, 2003. Consequently, the plea of diversion of the Company's funds to Prasad Media Corporation Ltd. has not arisen out of a new cause of action, but it is a piece of evidence to support the claim of diversion raised in the rejoinder. The courts are empowered to consider any new allegations made in the rejoinder for claiming appropriate remedies. Moreover, if anything is lacking in the company petition, it may be made good by the subsequent affidavits, upon which, the CLB could consider the entire evidence that is placed before it in order to do justice between the competing rights of the parties by which the case of justice will not suffer as held in Binod Kumar Agarwal v. Ringtong Tea Co. (P) Ltd., Siliguri (1995) 1 Camp LJ 138. Prasad Film Labs (Mumbai) Private Limited (PFLPL) is a wholly owned subsidiary of the Company. The Company acquired 10,000 equity shares of Rs. 100/- each of PFLPL; at a value of Rs. 1,95,54,221/- reflecting a huge valuation of premium equivalent to over Rs. 1,85,00,000/-, when M/s PFLPL suffered huge losses as at 31.03.2002 of Rs. 75,72,923/- and Rs. 1,23,66,474/-during the following year and carried huge bad debts amounting to Rs. 4.72 crores. There is no need for the Company to invest in the shares of the PFLPL. a loss making company. The Company failed to furnish particulars of its subsidiary company, viz., the proposed respondent No. 7 in its balance sheet in gross violation of Section 212. It is, therefore, a ruse for siphoning of the Company's funds, through its wholly subsidiary company. The entire investments made in PFLPL must be recovered in the interests of the Company and its shareholders. The application for impleadment of the proposed Nos. 6 & 7 is in aid of the main prayer for investigation of the accounts by an independent auditor made in the company petition. Section 106 of the Indian Evidence Act provides that if anyone has special knowledge of the facts, they must be heard and, therefore, the proposed parties are necessary before considering any relief by this Bench. For these reasons, Prasad Media Corporation Ltd. and PFLPL are necessary and proper parties to the company petition and such parties can be impleaded at any stage of the proceedings, including the appellate stage.

4. Shri T.K.Seshadri, learned Senior Counsel, while opposing the company petition submitted that the petitioners must satisfy the requirements of Section 397, as reinforced by the Supreme Court in Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. (2001) 105 CC 493, before claiming any relief before the CLB. They are -

that the affairs of the company are being conducted (a) in a manner oppressive to any member or members or; (b) in a manner prejudicial to public interest; and that the facts would justify the making up of a winding up order on "just and equitable" grounds;

but that the winding up would unfairly prejudice such members.

The petitioners have not made out that the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive of any member or members. The petitioners have neither established any case for winding up of the Company on just and equitable grounds. The averments made in support of winding up of the Company are quite insufficient. The Company as making profits, with huge general reserves and cash balances. There is no dead lock in the affairs of the Company. Thus, the petitioners failed to establish any of the requirements of Section 397 to succeed in their prayers; claimed in the petition. The petitioners collectively holding 2.88% of the paid up capital of the Company do not qualify under Section 399 to file the present Company Petition.

The Company is not a family company, but controlled by the second respondent, whose parents gave their shares to him and further purchased the shares from his sister. The plea of the petitioner Nos. 1 & 3 in the probate proceedings that the testator's (L.V. Prasad) wish was that the Company should be for the benefit of the entire family members was negatived by the High Court in its order dated 06.01.1999. The disposition of 2740 shares of the Company under the will of L.V. Prasad in favour of the respondent and his family members clearly indicate that the Company is not for the benefit of the family members of L.V.Prasad, but only of the second respondent and his family. The principles of limited partnership cannot be applied on the facts of the case, especially when the petitioners do not have any representation in the board of the Company and the second respondent always enjoyed the majority support in the Company. The alleged acts of oppression and mismanagement do not exist and the present proceedings are just to harass the respondents. The main grievance of the petitioners is that the rights shares have been exclusively allotted in favour of the respondents reducing the petitioners to a minuscule minority. The Company at a regularly and properly convened and conducted meeting increased the authorised share capital and the resolution passed increasing the capital was duly supported by the first petitioner. As on the date of allotment of the rights shares, the Company was a private limited company and there was no requirement of following the provisions of Section 81 of the Act. In Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, the Managing Director without allotting shares to other shareholders allotted to himself. In the present case, shares were allotted to all shareholders including the petitioners in good faith in accordance with Section 81. In view of this, the allotment of additional shares made in accordance with the resolution of the board of directors for the benefit of the Company cannot be challenged by the petitioners. By virtue of Article 6 of the articles of association of the Company, the shares shall be under the control of the directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and at such time as the directors think fit. Accordingly, the Company sent letters of offer to all shareholders including the petitioners, calling upon them to signify their willingness to subscribe to the rights shares. The respondents neither sent any letter of acceptance nor subscribed to the additional shares. However, at the meeting of the board of directors of the Company held on 20.09.2002, the second respondent informed the board that the first petitioner had met him with a request to keep in abeyance the allotment of shares earmarked for them for a month due to the financial and other problems faced by them, pursuant to the restraint order passed by the Debt Recovery Tribunal. Accordingly, the board of directors deferred the decision on the allotment of additional shares in favour of the petitioners enabling them to subscribe later for the additional shares and allotted 1,32,594 shares in favour of the second respondent and his family members in terms of their entitlement. This shows the bonafides of the board of directors. When the petitioners failed to bring in the share application money till February 2003, the board of directors at the meeting held on 29.03.2003 allotted the unsubscribed shares in favour of the respondents group. It is now well-settled that only one pre-emptive offer of shares is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled petitioners never sought any explanation for not allotting the additional shares in their favour, but unjustly filed the present company petition. The consent letters and the applications are dated 19.08.2002, but they were reportedly sent by the certificate of posting on 26.08.2002. There is no explanation for sending the consent letters dated 19.08.2002 to the Company only on 26.08.2002. The courts have repeatedly held that the certificate of po'sting is a weak evidence and cannot be relied, more so, when the transaction is under serious dispute, in support of which reliance has been placed on the following decisions:

L.M.S. Ummu Saleema v. B.B. Gujaral - to show that the certificate of posting might lead to presumption that a letter addressed to a person must have reached in due course the addressee. However, that is only a permissible and not an inevitable presumption. The presumption may or may not be drawn on the facts and circumstances of case. The presumption may be drawn initially, but on a consideration of the evidence the court may hold the presumption rebutted and may arrive at the conclusion that no letter was received by the addressee that no letter was ever dispatched as claimed. There have been cases in the past, though rare, where postal service and even postal seals have been manufactured.

S. Narayanan v. Century Flour Mills Limited (1987) 1 Comp LJ 25 (Mad) - to show that it is not always safe to trust mere certificate of posting. It will only show that certain postal envelopes were put into the post office; mere posting by itself will not necessarily mean that there was service on the addressee concerned. When, on the facts, registered posts Could be diverted and would not reach addressees, it was held highly risky to place reliance upon the mere certificate of posting.

Stridewell Leathers (P) Ltd. v. Shoe Specialities (P) Ltd. (supra) -to show that in case of despatch under postal certificates, a presumption may be drawn with regard to posting, but such resumption is rebuttable and that one will have to take into consideration the circumstances surrounding posting under postal certificates.

M.S. Madhusoodhanam v. Kerala Kaumudi (P) Ltd. (supra) - to show that service by certificate of posting is not reliable, when relationship between the parties already embittered. The proof of service in such cases must be viewed with suspicion.

When the Company sent the offer letter by registered post with A/D, it is not quite probable for the petitioners to send the letters of acceptance dated 19.08.2002, after an unexplained delay of seven days under the certificate of posting. The Company filed in January, 1994 a Civil Suit in O.S. No. 680/1994 on the file of City Civil Court at Madras against M/s Anand Cine Service to be given further pre-emptive rights in respect of those unaccepted shares as held in Sangramsinh P. Gaekwad v. Shantadevi, P. Gaekwad (supra). The fiduciary duty of a director, to the Company does not extend to a shareholder so as to entitle him to be informed of all the important decisions taken by the board of directors. Such a broad proposition of law would be inconsistent with the duty of a director vis-a-vis the company and the settled law that the statutory duty of a director is primarily to look after the interest of the company as held in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (supra). The directors of a company are in a fiduciary, position vis-a-vis the company and must exercise their power for the benefit of the company, as concluded by the Supreme Court in Nanalal v. Bombay Life Assurance Co. A.I.R. (37) 1950 SC 172.This isolated incident is not enough for grant of any relief under Section 397. It must be shown under Section 397 as held in Shanta Prasad Jain v. Kalinga Tubes Limited (1965) XXXV CC 351 that the conduct of the majority shareholders is oppressive to the minority as members, which must be continuous on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the Company are being conducted in a manner oppressive to some of the members. The conduct must be burdensome, harsh and wrongful. These requirements are evidently missing in the present case.

The Company during the period of L.V.Prasad was managed by the board of directors primarily consisting of L.V.Prasad and the second respondent. When L.V.Prasad died in June 1994 leaving a will, the petitioners challenged its genuineness. The High Court of Madras was pleased to conclude that the will was genuine, which was unsuccessfully challenged by the petitioners before the Division Bench of Madras High Court. Furthermore, the special leave petition preferred before the Supreme Court came to be dismissed. Consequently, 19% of shares of the Company bequeathed by late L.V.Prasad devolved upon the second, respondent. The respondents group holding 71.67% of equity share capital of the Company never exercised its absolute majority to take advantage of Article 6, but offered the additional shares to all shareholders in proportion to their existing paid-up capital ratio. There are no malafides in the decisions of the board of directors warranting interference by this Board. The petitioners neither denied the offer nor the quantum of shares offered to them by the Company, but challenged the mode of payment towards the additional shares, by appropriation of balances lying to their credit with the Company. When the cheques sent to the petitioners, returning the amounts lying to their credit with the Company, the petitioners never questioned it, until filing the company petition. The petitioners were not vigilant to exercise their rights to subscribe to the additional shares, for which the respondents can never be blamed. The represented by the first petitioner, being a partner, for an order of mandatory injunction directing M/s Anand Cine Service to return the out-door film shooting equipments. The petitioners have been fighting litigation before the High Court and the Supreme Court accusing the second respondent of fraud, forgery etc., in the matter of will of L.V. Prasad. It is, therefore, highly inconceivable that the petitioners would have sent the letters of acceptance under certificate of posting and, more so, when the letters of offer were sent to the petitioners by registered post with A/D. While it is contended in the company petition that the letters of acceptance were sent under certificate of posting, the petitioners have set out a new case in the rejoinder to the effect that the letters of acceptances were handed over in person to the second respondent by the second petitioner, in which case there was no need to send again the letters under certificate of posting. There is no reference as to when the consent letters were handed over in person to the second respondent. At the same time, the petitioners deny having met the second respondent in connection with allotment of shares. Thus, the petitioners are taking, conflicting stands at different points of time. If the petitioners had handed over the consent letters, followed by the letters under certificate of posting, the petitioners ought to have stated about delivery of the letters in person in the letters sent under certificate of posting. Hence, the petitioners are duty bound to establish that they had sent the consent letters together with the applications dated 19.08.2002 under certificate of posting on 26.08.2002 The Debt Recovery Tribunal by an order dated 18,09.1997 restrained the petitioner Nos. 1, 3 & 4 from alienating their shares held in the Company, pending the original application filed by Indian Bank.The Debt Recovery Tribunal by yet another order dated 31.01.2002 restrained the petitioner Nos. 1, 3 & 4 from making any transfer of their shares in the Company or from receiving any payment of any dividend thereon. These restraint orders are still in force. It is, therefore, free from doubt that the additional shares would have been definitely attached by the DRT. Nevertheless, no additional shares could be allotted against the credit balances of the petitioner Nos. 2 & 4, in the absence of any application made by the petitioners with the Company. The DRT by its order dated 11.07.2003 required the section respondent to stop the payment of cheque issued in the name of the fourth petitioner for Rs. 1,25,20,931/-, representing the amount refunded by the Company, and thereafter, the proceeds of the cheque were handed over to the Recovery, Officer of the DRT. The petitioners failed to make the payment in terms of the DRT order and, therefore, issued a recovery certificate against thepetitioners. When the petitioners' shares are sold by the Recovery Officer pursuant to the recovery certificate issue by the DRT for the dues of Indian Bank, the Company cannot refuse under Section 111 registration of the transfer in the name of the Court auction purchaser. The transfer of shares in a private limited company, to outsiders is prohibited and any sale of shares of the petitioners will cause serious prejudice and hardship to respondents. Therefore, the respondents have moved the DRT for purchase of the shares held in the name of the petitioners at a price, which may be determined by the DRT.

Shri T.K.Seshadri, learned Senior Counsel, while denying every act of mismanagement, elaborated as under;

The annual general meetings were hot held from 1994 to 2000 by virtue of the restraint order passed by the Madras High Court. Hence, these annual general meetings were held on 17.07.2002. This cannot constitute an act of mismanagement.

L.V Prasad, was the Managing Director till he died on 22.06.1994. The sale of raw silver was shown in the profit & loss account during the years 1982 to 1992 under the head "miscellaneous receipts". The respondents group cannot be accused for any misappropriation of the amount on account of the sale of raw silver for the period from 1983 to 1992. Thereafter, the sale, of raw silver was included in the "sale of by-products/ scraps", in view of the increasing recovery on account of the silver year after year and in consultation with the auditors. However, these are past and concluded acts, which are questioned belatedly, without assigning any explanation for such delay.

The statutory auditors of the Company have qualified the accounts repeatedly since the year 1989 onwards with regard to non-reconciliation of quantity of raw silver sold and received and non-confirmation of balances by the debtors :and creditors. The third petitioner was on the board at the relevant point of time and during his tenure he never made an issue of the same. The companies in film industry, survival of which is not always glorious, fail to respond to the call for confirmation of balances and the same cannot be put against the respondents.

The Company has been maintaining the fixed assets register, but not in the format as required by the auditors. However, the fixed assets register has now been brought upto date. The charges in relation to removal of certain machines belonging to a different company under control of the third respondent were raised in the meetings of the board of directors of the Company held on 13.01.1997, 15.01.1997, 27.01.1997 and 20.02.1997 by the petitioners and appropriately explained by the board of directors. But the petitioners have filed the present company petition in the year 2003 with the very same grievances.

The Company is in the film industry which is a speculative one. The prospects or recovery of dues from film producers entirely depend upon the success or failure of the films at the box office. Therefore, the phenomenon of bad debts is a normal feature in the business of film processing. The quantum of written off debts, viewed in the contrast of turnover and volume of business running into crores of rupees each year cannot be considered "huge", as contended by the petitioners.The Income Tax Department allowed such write off by the Company. The Company has been realising from time to time a part of the written off debts from the borrowers. When the Company was managed by the interim board under the chairmanship of a retired) High Court Judge with two members of the petitioners group nominated on the Board they had raised the issue of bad debts time and, again and such writing off of bad debts was duly approved. The petitioners invariably attended all the general meetings of the Company and adopted the accounts, but never raised any query regarding the writing off bad debts.

The grievances in regard to appointment of the respondent Nos. 2 to 4 as directors are based on conjectures and surmises. Form No. 32 dated ,24.02.2000 filed with the Registrar of Companies confirms the appointment , of the respondent Nos. 3 & 4 as additional directors with effect from 27.01.2000. The re-appointment of the third respondent as director at the annual general meeting held on 06.06.2002 has been seconded by the first petitioner. Furthermore, the election of directors cannot constitute an act of oppression as held in Ramashankar Prosad v. Sindri Iron Foundry (P) Ltd. AIR 1966 Calcutta 512, wherein it has been held that for a petition to succeed it must be shown that there has been oppression in a real sense of members qua shareholders. The petitioners claim that the certain amounts were due from a director to the Company during the year ended;31.03.1999, but the balance sheet for the year ended 31.03.1999, does not disclose any such outstanding dues payable by any director to the Company. However, the balance sheet for the year ended 31.03.2000, indicates the borrowing of certain directors. Nevertheless, the fourth respondent was not a director at the relevant point of time and he became director only on 27.01.2000 as borne out by form No. 32 dated 24.02.2000 but settled the loan amount of Rs. 2.50lakhs, when he became director of the Company. The loan amount of Rs. 2.60 Lakes was lent to Amaravathi Chemicals Ltd., a public limited company and thus it does not amount to any violation of the Act. The auditor's report on the accounts for the year ended 31.03.2000 reveals that the loans are regular and, therefore, the question of qualification by the auditor does not arise. The remarks of the auditors signed on 30.05.2001 are not italics or bold, as required by Section 227 (3)(e) of the Act. The allegations that the respondents group played massive fraud on the Company and that they enriched themselves at the expense of the Company are vague and not supported by any materials.

The Company charged depreciation on its assets at the rate prescribed under the relevant provisions of the Income Tax Act, which did not cause any prejudice to the Company. The claim of the petitioners that the depreciation must be charged in terms of Section 205 read With 350 and schedule XIV of the Act is erroneous. The auditors in their report on accounts for the year ended 31.03.1999 did not qualify on the depreciation at the rate prescribed under the Income Tax Act.

The Company has a policy of taking out the insurance cover depending on the exigencies. The issue of non-insurance of the assets was raised by the petitioners at the relevant board meeting and discussed in regard to the fire accident. The loss resulted in the normal course of business. The non-insurance of the assets is an act of past and concluded one, which cannot be now challenged.

According to the respondents, the entire events leading to the allotment of unsubscribed shares in their favour is on account of the undesirable behaviour and conduct of the petitioners. L.V. Prasad promoted and developed the Company. Ananda Rao, father of the petitioners Nos.1, 3 & 4 was never allowed to interfere in the business of the Company. The second respondent took over the management after the demise of L.V. Prasad, but could not effectively manage the Company, in view of the forced litigations and the change in the composition of the board of directors. The third petitioner got himself inducted to the board and was running a parallel business. The petitioner Nos. 1 & 3 are partners of M/s Anand Cine Service, who took the film equipment on lease from the Company neither returned nor paid the hire charges for, over nine years, forcing the Company to file a civil suit in O.S. No. 680/94 on the file of City Civil Court at Madras against M/s Anand Cine Service. The petitioners failed to file written statement for the past ten years and the civil suit is still pending. The petitioners questioned the genuineness of the will executed by L.V. Prasad before the High court of Madras and the Supreme Court. They further challenged the bonafides of the attestation of signature of late L.V. Prasad in the will by Shri S. Nandagopal, a Senior Chartered Accountant and a partner of M/s Brahmayya & Co., reputed auditors in the country. The first petitioner is in unlawful occupation of a flat at Madras belonging to the Company, but refused to vacate and hand over possession, which resulted in a civil suit filed by the Company for vacant possession of its flat. The first petitioner claims title to the flat by way of gift and adverse possession, while the property taxes and telephone charges are being paid by the Company.Thus, the Company is deprived of its assets both movable & immovable on account of the conduct of the petitioners. The conduct of the petitioners causing serious prejudice to the Company disentitles them from claiming any relief under Section 397 and 398,read with Section 235 of the Act, The petitioners do not hold the qualification shares and cannot invoke Section 237(b). The company petition has not been filed under Section 237(b), which cannot be now invoked by the petitioners. There are no valid grounds to invoke the jurisdiction of Sections 236 & 237(b), in support of which the following decisions, have been relied:

Barium Chemicals Ltd. v. Company Law Board (1966) XXXVICC 639- to show that the object of Section 237 is to safeguard the interests of those dealing with a company by providing for an investigation where the management is so conducted as to jeopardise, those interests or where a company is floated for a fraudulent or an unlawful object.

Rohtas Industries Ltd. v. S.D. Agarwal (1969) 39 CC 781 - to show that to exercise the power under Section 237(b), the existence of circumstances suggesting that the company's business is being conducted, as contemplated by Clauses (i), (ii) and (iii) must be made out by the parties.

Ashoka Marketing Ltd. v. Union of India (1981) 51 CC 634 - to show that if the parties invoking Section 237(b) fail to make out the existence of circumstances justifying the formation of an opinion that there was fraud, mis-feasance or mis-conduct on the part of the persons in the management of the company or towards the company or its members, the CLB will not order an investigation into the affairs of the company.

Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. (1983) 53 CC 493 - to show that no investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the company's business is being carried or when there is no evidence to establish prima-facie case of misappropriation or there is evidence showing fraudulent write off of bad debts Modi Industries Ltd. v. Union of India (1982) 52 CC 589 - to show that an investigation can be ordered into the affairs of the company only if there are circumstances suggesting either that the company is being conducted with the intent to defraud the creditors, members or any other persons or otherwise for unlawful purpose, etc. or that the persons concerned in the formation or management of its affairs have been guilty of fraud, mis-feasance or mis-conduct etc. Delhi Flour Mills Co. Ltd., In re S.L. Verma v. Delhi Flour Mills Co. Ltd. (1975) 45 CC 33 - to show that the object of investigation under Section 237 is to discover something which is not apparently feasible to the naked eye. Where a petition discloses merely facts which are apparent from the balance sheet of the company, an investigation will not be ordered. There must be prima-facie evidence in existence concerning circumstances which would lead to the conclusion that an investigation is necessary.

The Andhra Pradesh State Civil Supply Corporation Ltd. v. The Delta Oils and Fats Ltd. (1997) 3 Comp LJ 146 - to state that a mere statement of facts based on the auditors' report without any corroborative evidence will not assist the Company Law Board in framing the requisite opinion Under Section 235. The material placed before the Company Law Board should be such as to satisfy it that a deeper probe is necessary. Therefore, on the premise that on the basis of the material made available by the petitioner, it is not possible to form an opinion that the affairs of the company should be investigated, resulting in dismissal of the company petition.

Rohinten Mazda v. Hypoids (India) (P.) Ltd. (2004) 52 SCL 425 - to show that an order of investigation under Section 235 cannot be made on mere suspicion or surmise without proper materials enabling the CLB to form an opinion that the affairs of the company are required to be investigated.

His Highness Marthanda Varma v. Revel Tours and Travels Private Limited- Order dated 4th October, 1996 of Madras High Court C.P. No. 15 of 1991- to show that an investigation into the affairs of the company will be ordered only when the circumstances which may warrant such investigation, as indicated in Section 237(b), exist and not otherwise.

Shri T.K. Seshadri, learned Senior Counsel, while arguing the company application (CA 20/05) to implead the proposed respondent Nos. 6 & 7 pointed out that there are no pleadings on the alleged misappropriation of the Company's funds by the respondents group either in the company petition or rejoinder. All averments in relation to incorporation of the proposed respondent No. 6, implementation of the IMAX Theatre Project, investments made by way of preference shares in the proposed respondent No. 6, incorporated by the respondents 2 & 3 and the guarantee given by the Company securing the loans availed by the proposed respondent No. 6, not having been raised in the company petition, but only at the time of arguments cannot be gone into by the CLB. The respondents have not been afforded any opportunity to answer those charges ensuring the principles of natural justice, as envisaged in Section 10E(5) of the Act. The petitioners have not pleaded regarding the investments made by the Company in its subsidiary, being the proposed respondent No. 7 either in the Company petition or rejoinder and hence cannot be agitated at this belated stage. The plea that the balance sheet of the Company did not include the particulars of its subsidiary company, is taken care by the penal provisions for any such non-compliance. There is a specific disclosure in the directors report forming part of the balance sheet for the year 2000-2001 to the effect that the directors of the Company have floated a new company to implement the IMAX. Theatre Project. The first petitioner participated in the annual general meeting held on 17.07.2002 and seconded the adoption of the balance sheet for the year ended 31.03.2001. The petitioners never questioned the implementation of the IMAX Theatre Project by a new company to be incorporated by directors of the Company. The directors' report forming part of the annual report for the year 2001-2002, clearly discloses the investment of Rs. 15.51 Crores made by the Company in the proposed respondent No. 6. The petitioners had copies of the balance sheet for the year ended 31.03.2003 and the notice for the annual general meeting was sent twenty one days prior to the meeting, but the petitioners did not choose to raise the issue relating to the investments in the proposed respondent No. 6. The directors' report forming part of the annual report for the year 2002-2003 speaks of the investments in the proposed respondent No. 6 and guarantee given by the Company securing the loans availed by the proposed respondent No. 6 in favour of the financial institutions. In these circumstances, the petitioners ought to have amended the company petition, incorporating the averments, in regard to the IMAX Theatre . Project and its implementation by the proposed respondent No. 6. The CLB cannot go beyond the scope of the company petition. If no averments are made in the company petition, such new averments can neither be pleaded in the rejoinder, nor be argued. The Orissa High Court, while dealing with amendment application inN.K. Mohapatra v. State of Orissa (1995) 1 Comp LJ 266 (Orissa)- held that the power to allow an amendment being discretionary ought to be exercised carefully. All amendments will be generally permissible when they are necessary for determination of real controversy in the proceedings. All the same, substitution of one cause of action or the nature of the claim for another, is not permissible. The petitioners cannot let in evidence on the matters, which are not pleaded. The charges that there are diversion of funds of the company by the respondents must be proved, in which case the prayer claimed under 8(a) of the company application to amend the company petition including the proposed respondents 6 & 7 alone is not sufficient. The applicants have addressed arguments only for impleadment of the proposed parties but not on the remaining prayers. The respondents No. 2 & 3 are owning the proposed sixth respondent and therefore, the latter is not a necessary party to the present proceedings. Moreover, the proposed respondent No. 7 being a subsidiary of the Company need not be impleaded. The prayer is merely for impleadment of the proposed respondent Nos. 6 & 7, but no relief has been claimed against them and, therefore, they are not necessary parties. The application is misconceived, malafide and an abuse of process, made with a view to. delay the whole proceedings and, therefore, liable to be dismissed.

5. Shri Vedantham Srinivasan, learned Senior Counsel, representing the respondent Nos. 2 to 4 submitted : Late L.V. Prasad was producer and director of numerous films in Tamil, Telugu and Hindi, winner of Dadasaheb Phalke Award, doyen of Indian film industry and founder Managing Director of the Company. A statue of L.V. Prasad has been erected in Andhra Pradesh and an eye hospital opened in his name. L.V. Prasad had two sons viz. Ananda Rao, since deceased and the second respondent and a daughter: Ananda Rao. during his lifetime never took any interest in the affairs of the Company, but made use of funds of the Company for his personal gain. L.V. Prasad disowned Ananda Rao. The Company achieved greater heights under the aegis of L.V. Prasad and, the second respondent contributed solely towards the phenomenal growth of the Company with turn over of several crores of rupees. L.V. Prasad held 19%., while his daughter 15% and the second respondent was holding 38% of the shareholding of the Company. L.V. Prasad bequeathed his 19% and daughter sold her 15% holding in favour of the second respondent increasing his shareholding to 72%. The petitioners were holding 28% of the equity share capital of the Company. Ananda Rao's sons who are the petitioners 1 & 3 are indebted to a tune of over Rs. 600 crores. A large number of criminal cases and CBI enquiry are pending against them. The petitioners are in film processing business in competition with the Company. The petitioners are always at loggerhead with the respondents, as borne out by the probate and several other pending proceedings. The petitioners are the oppressors. The petitioners have now initiated a civil suit with the same allegations against the respondents and initiated criminal proceedings against the Company's auditor and the senior counsel, thereby harassing them without any justification. The provisions of Section 81 are inapplicable to the Company, being a private limited company, yet, the Company offered additional shares to all shareholders including the petitioners, according to their entitlement. Therefore, the decision of the Supreme Court in Dale & Harrington has no application on the facts of the present Company petition. The petitioners defaulted to settle the dues of Indian Bank. The Bank has taken steps against the petitioners under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (Second) Act, 2002 and their assets are being auctioned. Any allotment of additional shares to the petitioners will go to the benefit of Indian Bank and therefore, the petitioners do not suffer any prejudices on account of non allotment of any additional shares in their favour. The consent letters and certificates of posting produced by the petitioners are fabricated documents. The amounts due to the petitioners were returned to them in consultation with the auditors, which was not questioned till filing of the company petition. The cheques, sent to the petitioners by the Company were attached by the DRT and the proceeds were realised for the dues of Indian Bank.

L.V. Prasad died in June 1994, leaving a will, which resulted in litigations between the petitioners and the respondents before a Single Bench and Division Bench of the Madras High Court and the Supreme Court, wherein the genuingness of the will was upheld. The petitioners making use of these litigations got the third petitioner inducted in the board of directors under the Chairmanship of a retired High Court Judge. The petitioners are parties to the decisions taken at the board meetings and in particular in relation to many of the contentious issues now raised including the increase in authorised capital, adoption of accounts, appointment of the auditors, writing off bad debts etc. Therefore, the petitioners are estopped by their conduct, waiver and acquiescence to reagitate the very same grievances before the CLB.

The proposed respondent No. 6 was incorporated to implement the IMAX Theatre Project in accordance with the conditions stipulated in the tender caused by the Government of Andhra Pradesh. The new company will reap income tax benefits for 5 years. The Company invested Rs. 15 crores 11% cumulative preference shares besides 25, equity, shares of Rs. 100/- each, with the object of ensuring a definite return to the Company. This does not involve any risk and will redeem the preference shares, if the petitioners are desirous of the same. Though the respondents wanted to repay the IDBI loan, the loan documents do not permit foreclosure of loans. The petitioners cannot treat the incorporation of the proposed respondent No. 6 as an act of oppression. The Company's general reserves are, several crores of rupees with huge assets. The Company could not pay dividend for want of cash profits. The Company by investing in the proposed respondent No. 7 owns its assets. The investment decisions are prudent decisions. The CLB will not interfere with the business decisions the board of directors. The Company never suffered any prejudice on account of the acts of the respondents. The petitioners cannot go beyond the pieadings. If there are no pleading, the reliefs must be struck off.

The sale proceeds of raw silver have been shown in the accounts under the head "miscellaneous receipts" prior to the year ended 31.03.1992, and thereafter, owing to increase in recovery on account of silver, silver sales are being accounted under a separate head "sale of by-products and scrap", in consultation with the Company's auditors. The balance sheet of Genuine Industries and Imaging Limited and Ravi Shanker Industries for the year ended 30.06.1999 and 31.03.2002 under control of the petitioners do not disclose any income from sale of silver, even though, those companies would be receiving income from sale of silver. This belies the charges of the petitioners. The Company's studio is the biggest in Asia and there area number of branches in several states. The Company in the course of its businesses bound to give credit to its customers and therefore, bad debts are inevitable. However, bad debts have been written off on the advice of the auditors and by the collective wisdom of the board of directors, including the petitioners and approved by the Income Tax Department. The Company used to take into consideration several factors, including chances of recovery or failure of pictures at the box office, relationship with the film producers etc., before writing off the bad debts. The statistics for the period from 1993 to 2003 would indicate that the quantum of bad debts written off is a minuscule percentage of either the networth or turnover or profitability of the Company.

The petitioners ought to have come with clean hands to claim the equitable reliefs. The charges levelled by the petitioners must be specific so as to order for an investigation into the Company's affairs. The Company is well managed and its turnover increased over one hundred times. The respondents meticulously followed the articles and the relevant provisions of the Act and no motive or lack of integrity can be attributed to the respondents.The petitioners failed to make out any case of oppression or mismanagement in the affairs of the Company. The prayers of the petitioners must be declined.

6. Shri Sankaranarayanan, learned counsel, while supplementing the arguments of Shri Vedantham Srinivasan, learned Sernior Counsel submitted: The third petitioner was on the interim board under the Chairmanship of a retired High Court Judge, which came to be dissolved and the third petitioner ceased to be director, with termination of the Civil Suit proceedings before the High Court. The third petitioner had raised all the contentious issues in the course of proceedings of the interim board, but filed the present company petition in March, 2003 for the same alleged irregularities. The Company sent letters to the petitioners on 13.08.2002 offering shares in proportion to their existing shareholding, but they failed to send any letters of acceptance. The consent letters are dated 19.08.2002, but they were reportedly sent under certificate of posting on 26.08.2002. The consent letters posted after seven days under certificate of posting are silent about delivery of such letters in person to the second respondent. The petitioners did not apply for the additional shares till February 2003, forcing the Company to allot the unsubscribed shares to respondents group, after affording adequate opportunity to the petitioners and, therefore, the impugned allotment of shares cannot amount to an act of oppression. The petitioners did not evince any interest in the shares, but rather waived their rights and therefore the Company returned the amount due to the petitioner 2 & 4 by way of cheques dated 20.03.2003.The sole object of the petitioners is to keep the litigations alive, thereby harassing the respondents. The petitioners failed to encash the cheques, representing the balances lying to their credit with the Company, which later got attached by the DRT at Chennai. The third petitioner actively took part in the board meetings held from time to time, as seen from the minutes of the following board meetings:

At the board meeting held on 08.09.1995, apart from review of investments, present operations and future plans of video division and details regarding outside agencies housed in the properties belonging to the Company were deliberated. The adoption of audited accounts for the year ended 31.03.1993 stood adjourned to a future date.

At the board meeting held on 13.09.1995 the sitting fee of the Chairman of the Company for the board meetings of the Company was approved and the agenda on setting up of wind power generating plant was discussed.

At the board meeting held on 13.10.1995, the third petitioner sought certain clarifications on the accounts for the year ended 31.03.1993, and therefore, the agenda for approval of the accounts for the year, ended 31.03.1993 stood adjourned to a future date.

At the board meeting held on 07.11.1995, certain details on the bad debts were called, for, before adopting the accounts for the period ended 31.03.1993 and the wind power generating plant project was discussed.

At the board meeting held on 16.11.1995, while the accounts for the year ended 31.03.1999 were approved, a number of bad debts were written off, after taking the view point of all directors, including the third petitioner.

At the board meeting held on 29.11.1999 the, agenda, regarding writing off the bad debts was disallowed.

At the board meeting of 04.12.1995, the agenda regarding recovery of the equipments leased by the Company to M/s Anand Cine Service came up for consideration and the directors decided to take up the issue after final decision of the court in the pending civil suit initiated by the Company against M/s Anand Cine Service.

At the board meeting held on 09.12.1995, the board of directors including the third petitioner resolved that the resolution dated 07.11.1995 reversing the entries "written off as bad debts'', in the statement of accounts be reversed and cancelled.

At the board meetmg held on 02.01.1996, the agenda regarding raw stock, wastage accounts and bad debts came up for discussion and decided to get an expert opinion from the Company's auditors.

At the board meeting held on 26.02.1996 the agenda regarding raw stock and wastage came up for discussion.

At the board meeting held on, 19.04.1996 the issue relating to the accounting of wastage of raw stock was discussed, taking into account the suggestions received from the auditors.

At the board meeting held on 06.05.1996, the board of directors accepted the suggestions of the auditors regarding the procedure for accounting wastage of raw films and further resolved to implement the new change in the accounting system with effect from 01.07.1996.

At the board meeting held on 17.05.1996 and 17.06.1996 the board of directors discussed about the implementation of raw stock accounting system by the Company with effect from 01.07.1996.

At the board meeting held on 28.06.1996 the board of directors discussed on the modus operandi and the implementation of the raw stock accounting system by the Company and finalisation of accounts of the Company.

At the board meeting held on 22.07.1996 the board of directors discussed the auditors' report on raw stock wastage and the qualification of the auditors in their report regarding non-reconciliation of raw stock wastage.

At the board meeting held on 08.08.1996, the issue in relation to the profit, and loss account and balance sheet of Company's subsidiary company, viz., the proposed respondent No. 7 was considered.

At the meeting of directors on 21.08.1996, when the resolution for appointment of a committee consisting of members from the board and an independent auditor to go into the entries of the raw stock ledgers of the last seven years came for consideration, the third petitioner and yet another director voted for the resolution. But the votes cast against the resolution being more than votes in favour, the resolution was not put through.

At the board meetings held on 31.08.1996 the draft accounts for the year ended 31.03.1994 were considered.

At the board meetings held on 10.09.1996, 12.09.1996, 18.10.1996, 05.11.1996, 03.12.1996, 13.01.1997, 15.01.1997, 27.01.1997 and 24.02.1997, third petitioner endeavoured to ascertain the in house details of the Company and nothing else.

At the board meeting held on 10.05.1997, the draft accounts for the year ended 31.03.1996 were considered.

Shri Shankaranarayanan, learned Counsel, while concluding his submissions reiterated that all the contentious issues which are being agitated before this Bench, were already raised, deliberated and appropriately dealt with by the board of directors, including the third petitioner. Hence, the very same issues ought not to be entertained.

Shri Shankaranarayanan, learned Counsel, While opposing the application for impleading the proposed respondent;nos. 6 & 7, submitted that the annual return of the Company for the year 2000-2001 clearly indicates that its directors would float a new company to implement the IMAX Theatre Project, but the petitioners, failed to raise their voice at the relevant point of time. The balance sheet for the years ended 31.03.2002 as well as 31.03.2003 discloses the details of the investments made by the Company in the proposed respondent No. 6. Thus the incorporation of the proposed respondent No. 6 by the respondent Nos. 2 & 3 and the investments of the Company in the proposed respondent Nos. 6 & 7 and guarantee of the Company for the facilities availed by the proposed respondent Nos. 6 are well within the knowledge of the petitioners, but these are belatedly agitated in order to harass the respondents. The petitioners raised in the rejoinder new allegations of diversion of the Company's funds to the proposed respondent No. 6, but failed to file any application forthwith for impleadment of the proposed respondents 6 & 7. The petitioners ought to have filed such application, at least upon filing of sur-rejoinder, by the respondents, but the application for impleadment has been filed only in February, 2004. The petitioners are seeking to implead the proposed respondent Nos. 6 & 7, but no amendment is sought claiming any relief against them. The petitioners are to file a fresh company petition for the new cause of action against the proposed respondents 6 & 7. The application being a sheer abuse of process of law deserves to be dismissed.

7. Shri Datar learned Senior Counsel in his rejoinder submitted that the communications dated 13.08.2002 of the Company offering the rights Shares to the petitioners were sent to them at the Company's address, acceptance of which would be the common course of natural events, as envisaged in Section 114 of the Indian Evidence Act. All case laws cited on behalf of the respondent regarding the certificate of posting which held that it cannot be treated as conclusive evidence, are in the context of notices for the board or general meetings sent to the parties, wherein adverse decision were eventually taken, unlike in the present case, where the respondents in no way be prejudiced and, therefore, the human conduct of the petitioners should have,been to send the consent letters under certificate of posting, thereby accepting the rights shares offered by the Company. The offer made by the Company clearly states that if the petitioners do not wish to apply for the shares, they will be allotted at the discretion of the board of directors of the company. When the petitioners are benefited by accepting the offer made by the Company, there cannot be any reason as to why the petitioners would not have accepted the offer for rights shares. By virtue of Section 53(2) of the Act, a document duly addressed and stamped and sent under certificate of posting is deemed to have been duly served in the ordinary course of post; The petitioners never made any demand for refund of the balances lying to their credit with the Company for the past 15 years, but the Company unilaterally refunded the monies without any reason by way of cheques, which are still not encashed. The proceedings between the petitioners and Indian Bank before the Debt Recovery Tribunal and the probate proceedings on account of the will executed by late LV.Prasad have no bearing on the allotment of additional shares. Therefore, the petitioners must be allotted the rights shares offered by the Company. The principles enunciated by the Supreme Court in Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan have not been watered down in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekward (supra). Any allotment of shares for personal aggrandisement must be set aside. The petitioners have been holding 28% of the equity shares of the Company, since the days of late L.V. Prasad and, therefore, the petitioners are legitimately entitled to the rights shares. The proposed respondent No. 6 is engaged in the film business in competition with the Company, No details in this behalf have been furnished to the board of directors of the Company and there are no constraints for the Company to implement the IMAX Theatre Project. Therefore, the petitioners are entitled for the prayers made in the company petition.

8. I have considered the pleadings and elaborate arguments of learned Senior Counsel. Before dealing with the rival claims, it would be appropriate to consider the preliminary objection raised by the respondents on the right of the petitioned to apply under Sections 397 and 398 of the Act. Section 399 provides that in case of a company having a share capital, not less than one hundred members or not less than one-tenth of the total number of its members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the Company may make an application under Section 397 or 398. The authorised capital of Rs. 20,00,000/- of the Company as stood at its incorporation came to be increased to Rs. 2,00,00,000/- at the annual general meeting held on 06.06.2002. After giving effect to the increase in authorised capital, the Company had allotted on 20.09.2002, 1,32,594 equity shares and further 52,405 equity shares of Rs. 100/- each on 29.03.2003 in favour of the respondents group, thereby the shareholding of the petitioners group got reduced from 28.33% to 2.88%, These allotments are being impugned in the present company petition as oppressive to the petitioners. In such cases, this Board always examines the validity of allotment as a preliminary issue. If the allotment were to be declared as invalid, the petition would be maintainable and not otherwise, if the allotment is held as valid. The petitioners admittedly, even otherwise constitute not less than one-tenth of the total number of members of the Company and, therefore, the plea of the respondents on the maintainability of the company petition must fail.

The main grievances of the petitioners relate to the allotment of additional shares in favour of the respondents group in exclusion of the petitioners, several acts of mismanagement and diversion of the Company's funds by the respondents group, which are reportedly oppressive to the petitioners and prejudicial to the interests of the Company. It is on record that the Company was incorporated on 31.08.1956. L.V.Prasad and his eldest son, viz., Ananda Rao, father of the petitioners 1, 3 & 4 were subscribers to the memorandum of association and articles of association of the Company, each subscribing one share of Rs. 100/- each. L.V. Prasad and Ananda Rao, along with two others, were the first directors, who were to hold office till the annual general meeting of the company in the year 1960. Prior to the impugned allotments, while the petitioners group was holding 28.33%, the respondents group held 71.67% of the paid-up capital of the Company. When the authorised capital was increased to Rs. 2,00,00,000/- at the annual general meeting held on 06.06.2002, the resolution for, the increase in authorised capital was seconded for adoption by the first petitioner, as borne by copy of the minutes dated 06.06.2002 of the annual general meeting of the Company. After giving effect to the increase in authorised capital, the Company offered 1,85,000 shares to all shareholders in proportion to their existing paid-up capital ratio. Accordingly, the Company had sent letters, among others, to the petitioners on 13.08.2002 offering 52,406 shares, viz., 22,921 shares to the first petitioner; 313 shares to the second petitioner; 23,216 shares to the third petitioner and 5,956 shares to the fourth petitioner, under registered post A/D and calling upon them to send their acceptance within fifteen days of receipt of the offer letters. According to the respondents the petitioners did not send any letter of acceptance, but the first petitioner requested the second respondent in person to give a month's time to take a final decision on the allotment of shares earmarked to them, in view of the financial mess faced by them and the restraint order passed by the DRT, which was acceded to by the board of directors of the Company. However, the petitioners deny having met the second respondent with any request to defer the allotment of shares to them for a period of one month, but strongly urged that they submitted the duly filled in applications dated 19.08.2002 together with an authorisation letter of even dated from the second petitioner, authorising the Company to debit the outstanding amount from her current account against the additional shares offered in favour of each of the petitioners. There are two different versions of the petitioners regarding the consent letters, the first one being that the consent letters together with the applications dated 19.08.2002 were sent under certificate of posting on 26.08.2002. The other version is that the letters were handed over in person to the second respondent by the second petitioner, followed by the letters sent under certificate of posting on 26.08.2002 to the Company. Thus, the petitioners and the respondents have taken altogether different and conflicting stands in the matter of acceptance of the offer by the petitioners for additional shares. The Madras High Court in S. Narayanan v. Century Flour Mills Limited (supra), while considering service of notice by the company came to the conclusion that it is not always safe to trust mere certificate of posting and that it is highly risky to place reliance upon the mere certificate of posting. It will only show that certain postal envelopes were put into the post office; mere posting by itself will not necessarily mean that there was service on the addressee concerned. The Supreme Court in L.M.S. Ummu Saleema v. B.B. Gujaral (supra) held that the certificate of posting might lead to a presumption that a letter addressed to an addressee has been posted on the date appearing in the certificate of posting and in due course reached the addressee. But, that is only a permissible and not an inevitable presumption. The presumption may or may not be drawn. On the facts and circumstances of a case, the presumption may be drawn initially, but on a consideration of the evidence, the court may hold the presumption rebutted and may arrive: at the conclusion that no letter was received by the addressee or that no letter was ever dispatched as claimed. There have been cases' in the past, where postal certificates and even postal seals have been manufactured. The Supreme Court in M.S. Madhusoodhanan v. Kerala Kaumudi (P) Ltd. (supra) categorically held that service of notice by certificate of posting is not reliable and must be viewed with suspicion, when relationship between the parties is already embittered. This Board in Stridewell Leathers (P) Limited Cs. Shoe Specialities (P) Limited held that in case of despatch under postal certificates, a presumption may be drawn with regard to posting. As such, presumption is rebuttable, but one will have to take into consideration the circumstances surrounding posting under postal certificates. Though, in the case of despatch under postal certificate a general presumption of posting could be drawn, as held in Akbarli A. Kalvert v. Konkan Chemicals Pvt. Ltd. (supra), yet, such presumption would depend upon the facts and circumstances of each case. Moreover, raising of a presumption does not by itself amount to proof. The decision of the Calcutta High Court Jadapore Tea Co. Ltd. v. Bengal Dooars National Tea Co. Ltd. (supra), drawing the presumption of receipt of the notice under certificate of posting deals with different situation and has no application to the facts of the present case. In the light of the dubiousness surrounded around the certificates of posting, it shall be seen whether the petitioners would have sent, on the fact and in the circumstances of the present case, the consent letters dated 19.08.2002 to the Company, under certificate of posting on 26.08.2002. L.V. Prasad died on 22.06.1994 leaving a will, When the second respondent had applied for the grant of probate of the will, the petitioners opposed the probate proceedings and assailed the will of L.V. Prasad, bequeathing his shares of the Company in favour of the second respondent, as a fake one on the ground, inter-alia, that "As per the wish of the testator Prasad Production ("the Company") should be for the benefit of the entire family and none should get additional advantage or exclusive control of the said company". The petitioners exhausted all their remedies, including before the apex court, unsuccessfully. The parties are litigating over the film shooting equipments leased out in favour M/s Anand Cine Services and recovery of possession of a flat in possession of the first petitioner. Thus, the relationship between the petitioners group and the respondents group stands embittered for several years beyond redemption. The petitioners are admittedly in receipt of the written offer made by the Company for additional shares and, therefore, they must necessarily be aware that the offer for additional shares would lapse if they fail to apply within 15 days thereof. The petitioners having seriously fought for the shares of L.V. Prasad bequeathed in favour of the second respondent must be conscious of their valuable right to apply for the additional shares offered by the Company. In the context of strained relationship on account of a series of litigations between the parties, human conduct of the respondents must be to ensure that the consent letters for additional shares definitely reach the Company, without giving any chance to the respondents denying receipt of any such letter within the stipulated time. However, the petitioners reportedly chose to send the consent letters along with the applications dated 19.08.2002, after a delay of seven days under certificate of posting. There is no explanation as to why such of the essential documents involving valuable right of the petitioners must be sent under certificate of posting, more so, when all is not well between, the parties. The petitioners litigating with the respondents in the common course of natural events, would have been diligent enough to send the applications for additional shares in a prudent way and not under certificate of posting. While at one point of time, it is reported that the petitioners sent the consent letters together with the applications by certificate of posting, it is contended at a later point of time that the consent letters were handed over in person to the second respondent by the second petitioner, followed by the letters sent under the certificate of posting to the Company .There is no material as to when and in whose presence the consent letters were handed over in person to the second respondent. The second petitioner, being wife of the first petitioner and considering the strained relationship between the two families, she could not have handed over the letters of immense value without obtaining any acknowledgment from the second respondent. Furthermore, the letters reportedly sent to the Company at a later point of time on 26.08.2002 makes no reference to the delivery of such letters in person in favour of the second respondent. There is nothing other than the certificate of posting, which is a weak evidence to sustain the despatch of consent letters to the Company. The submission of Shri Datar, learned Senior Counsel that considering the valuable assets offered to the petitioners, they would not have failed in the common course of natural events, to apply for additional shares and, therefore, their action in having sent the consent letters under certificate of posting cannot be discounted is appreciable. However, at the same time, it shall be borne in mind that the petitioners never, after reportedly sending the consent letters attempted to ascertain from the Company regarding the allotment of additional shares in their favour, even after receipt of the cheques in March, 2003 representing the amounts payable to the petitioner Nos. 2 & 4, till filing of the company petition. The natural human conduct of the petitioners must be to pursue the issue of additional shares with the Company.The plea that the Company would not in any way be prejudiced, in denying receipt of the consent letters sent under certificate of posting is not convincing, in view of the fact that while the board of directors allotted 1,32,594 shares on 20.09.2002 to the respondents group, deferred the allotment of additional shares in favour of the petitioners. It is not under dispute that the unallotted shares of 52,405 were allotted only on 29.03.2003 in favour of the respondents group. In these circumstances, I am, prima facie of the view that the consent letters dated 19.08.2002 would not have been either posted on 26.08.2002 by the petitioners under certificate of posting or handed over in person to the second respondent. Notwithstanding the claim and counter claim of the parties in regard to acceptance of the offer by the petitioners for additional shares, it shall be seen whether the impugned allotments are oppressive of the petitioners and if so, whether interference of this Board is warranted, providing any remedial measures.

The Company at its annual general meeting held on 06.06.2002 adopted a resolution for an increase in the authorised share capital from Rs. 20,00,000/- to Rs. 2,00,00,000/-. The resolution for the increase in the share capital was seconded by the first petitioner for adoption by members of the Company. The share capital was increased to meet the "commercial, exigency" of the Company as averred in the reply statement filed on behalf of the Company (para 5 at page 11). After giving effect to the increase in authorised share capital, the board of directors at the meeting held on 10.08.2002 approved the issue of further shares and offered 1,85,000 shares to all the shareholders in proportion to their existing holdings in the Company. Accordingly the petitioners were offered l,32,594 shares and the respondents 52,406 shares (22,921 shares to the first petitioner; 313 shares to the second petitioner; 23,216 shares to the third petitioner and 5,956 shares to the fourth petitioner), as borne out by the letters dated 13.08.2002 of the Company, thereby the directors not only satisfied the test of bonafides, but also acted with a proper motive, as laid down in Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan (supra). All shareholders including the petitioners were to apply for the additional shares in the prescribed application form within 15 days of receipt of the offer letters, failing which the entire shares would be allotted at the discretion of the board of directors of the Company. The application form, copy of which is on record reveals, that the shareholders must indicate, inter-alia, the number of shares applied for and remit the share application money by cash or cheque or demand draft as the case may be. This requirement shall apply to every shareholder inclusive of the petitioners and the respondents. At this juncture without going into the merits of the claim of the respondents that the consent letters together with the applications were handed over in person to the second respondent by the second petitioner, followed by the letters sent under certificate of posting on 26.08.2002 in favour of the Company and the counter-claim of the respondents that the first petitioner requested the second respondent in person to give a month's time to take a final decision on the allotment of shares earmarked for the petitioners, it is observed from copy of the minutes of the board meeting held on 20.09.2002 that the directors decided to give time to the petitioners, as requested by, them to bring in further share application money and further that the petitioners would be allotted the additional shares once they bring the further share application money. In this connection, the resolution passed by the board of the directors at the meeting held on 20.09.2002 allotting the rights shares in favour of the respondents assumes importance, which reads as under: -

The Chairman informed the Board that Mr. A. Ravishankar Prasad and Mr. A. Manohar Prasad have requested a month's time for the payment of the amount as they were hoping to mobilize funds by that time. The Board decided that they be given some more time as requested by them to bring in further share application money and once they bring the further share application money, shares would be allotted at that time. Regarding the shareholders who have already given the share application money, the Board decided to allot the shares.

The minutes of the board meeting indicate that the board of directors allotted 1,32,594 shares in favour of the respondent group, since they had already given the share application money. In this connection, it is absolutely relevant to make a reference to the averments made in para 6.1.11 of the company petition to the effect that "... the petitioners, in an attempt to ferret out the truth, made a search of records at the office of the Registrar of Companies, Tamil Nadu, Chennai and came to know that the second respondent, viz., Shri A.Ramesh, had gone ahead and allotted a total of 1,32,594 equity shares to himself and his group on 20.9.2002 against various alleged credit balances lying in their account Copy of the Return of Allotment (Form No. 2) dated 16.10.2002 filed by the company with the Registrar of Companies for the purported allotment of shares on 20.9.2002 is enclosed as ANNEXURE A8. The search, which was made on 25,03.2003, reflected this position and hence the petitioners now have been reduced to a miniscule minority of 2.88% if the shares so allotted to the respondents are also taken into account." These averments are not controverted either in the reply statement filed on behalf of the Company or at the time of arguments advanced by the learned Counsel representing the respondents. Furthermore, the petitioners in their rejoinder categorically pleaded that "In fact, the petitioners have clearly stated in the Petition that even in respect of allotment of rights issue of shares to the other shareholders, their deposit accounty was debited against consideration for such shares and no cash was brought in by the said shareholders. The respondents have not denied that." (para 13). This stands unrepudiated in the sur-rejoinder filed by the respondents. Thus, there is no material to show that the respondents remitted the share application money in respect of 1,32,594 shares by way of cash or cheque or bank draft at the time of allotment made at the board meeting held on 20.09.2002, in terms of the offer letter dated 13.08.2002 sent by the Company. Therefore, it appears that the rights shares viz., 1,32,594 were allotted to the respondents against the amounts due to them from the Company. At the same time, the allotment in favour of the petitioners was deferred for not having brought further share application money by them. This discrimination, in my view, is in no way justifiable. It is not under dispute that as on the date of allotment and thereafter, both the second petitioner and fourth petitioner had credit balances to their account with the Company to the tune of Rs. 57,05,542/-and Rs. 1,25,20,931/- respectively. However, the Company chose to return the amounts to the credit of the petitioners 2 & 4 together with interest thereon without any demand from them as borne out by the communications dated 20.03.2003 and 25.03.2003 of the Company, enclosing two cheques dated 20.03.2003 for an amount of Rs. 1,25,20,931/- and Rs. 57,05,542/- respectively. The statement made on behalf of the petitioners that the credit balances were lying with the Company for the past 15 years has not been denied. In this connection, the averments made in paras 7 & 8 of the reply statement filed by the Company assumes great relevance which read thus:-

7. The first petitioner had also made a request to the second respondent that the shares could be allotted against the amount due to the 2nd petitioner and 4th petitioner.

The second respondent however did not readily agree to the suggestion as the first petitioner owed a sum about Rs. 1.40 Crores and a suit had been filed and the same was pending. The copy of the plaint in the above suit is filed as Annexure R-10.

8. The respondent therefore insisted upon bringing in actual cash by the petitioners. The respondent had already been with a restraint order by the Debt Recovery Tribunal attaching the shares held by the petitioners 1, 3 and 4 and prohibiting the respondent from transferring alienation of the said shares. The copy of the said order is filed as Annexure R-11.

It is observed that the request of the second respondent for allotment of the additional shares against the amounts due to the petitioners 2 & 4 was not acceded to by the second respondent for the above given reasons. The civil suit in O.S. No. 680/1994 filed before City Civil Court at Madras against M/s Anand Cine Services is for an order, inter-alia, of mandatory injunction directing M/s Anand Cine Services represented by its partner, being the first petitioner, to return the outdoor film shooting equipments and not for recovery of the outstanding amount of Rs. 1.40 crores reportedly due from the petitioners, as claimed by the Company. It is true that the petitioners have suffered a restraint order made by the Debt Recovery Tribunal thereby the petitioners 1, 3 & 4 have been prohibited from transferring their shares held in the Company. This restraint, order is in no way an embargo on the part of the Company to allot further shares in favour of the petitioners. The concern of the respondents that the additional shares after allotment in favour of the petitioners would go to the benefit of Indian Bank apart from being far fetched, cannot take away their right for the additional shares. Against this background, the averments made in para 15 of the reply statement filed on behalf of the Company that "the petitioners did not seek to adjust the amounts due to persons belonging to the petitioners group" is not justified, more so, when the second respondent, being the Managing Director of the Company, admittedly refused the request of the petitioners for, appropriation of the amounts due to them towards share application money. Against this background, the board of directors at the board meeting held on 20.09.2002 under the chairmanship of the second respondent, while allotting the additional shares in favour of the respondents group against the amounts due to them ought to have similarly allotted the additional shares in favour of the petitioners against the amounts due to them. There is no justification fof hot having allotted the additional shares in favour of the petitioners, while at the same time, the additional shares were allotted to the respondents group without receipt of any share application money, thereby the directors have not acted bonafide while exercising discretion vested in Article 6 in allotment of shares of the Company. Even otherwise, the board of directors at the board meeting held on 29.03.2003 under the chairmanship of the second respondent allotted the unsubscribed shares of 52,405 in favour of the respondents group, without giving any opportunity to the petitioners to bring in the share application money, more so in the light of the resolution passed at the board meeting held on 20.09.2002. It was resolved that "the Board decided that they (the petitioners) be given some more time as requested by them to bring in further share application money and once they bring the further share application money, shares would be allotted at that time". It is true that the Company could not eternally wait for the allotment of additional shares and that the directors of a company are in a fiduciary position vis-a-vis the company and must exercise their power for the benefit of the Company, as held in Nanalal v. Bombay Life Assurance Co. (supra). However, it is obligatory on the part of the directors, in the light of the special circumstances which arose on account of the resolution passed at the board meeting held on 20.09.2002 granting some more time to bring in further share application money by petitioners, send a prior intimation in favour of the petitioners, before allotting the unsubscribed shares in favour of the respondents. This fiduciary duty of directors of the Company; has been recognised by the Supreme Court in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (supra) thus: "In an appropriate case, a fiduciary relationship may come into being having regard to the responsibility undertaken by the directors towards the shareholders by way of a special contract.'' The obligation becomes more onerous in the light of the fact that the allotment of 1,32,594 shares in favour of the respondents were already made not against any fresh share application money, but against the amounts lying to their credit with the Company. Furthermore, the Company had unilaterally returned the amounts due to the petitioners, without allotting the shares against the outstanding amounts due to them. Thus, the board of directors of the Company failed to treat the petitioners and the respondents alike, but acted against the interests of the petitioners. In these circumstances the principles laid down in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad (supra) that ''... only one pre-emptive offer of shares is to be made which is otherwise to be accepted or not at all. The existing shareholders are not entitled to be given further pre-emptive rights in respect of those unaccepted shares", have no application on the facts of the present case. The allotment in favour of the respondents group is neither bonafide nor is a proper and legal procedure followed to make the allotment and therefore, the allotment of unsubscribed shares to the respondents group is liable to be set aside as laid down in Dale & Harrington Investment (P) Ltd. v. P.K. Prathapan (supra). Having found that the action of the directors in allotting the unsubseribed shares to the respondents group without prior notice to the petitioners is not proper and bonafide, the duty of the directors to disclose as regards the issue of unsubscribed shares towards the shareholders, being the petitioners is absolute, as laid down in Sangrasinh P. Gaekwad v. Shantadevi P. Gaekwad (supra).The Supreme Court further held that "An isolated incident may not be enough for grant of relief and a continuous course of oppressive conduct on the part of the majority shareholders is, thus, necessary to be proved''. The Supreme Court while using the word 'may' and not 'shall' stipulates that "continuous course of oppressive conduct" is to be proved. In the present case, the allotment of impugned shares in exclusion of the petitioners group, though a single wrongful act is nothing but an act of oppression, especially when the impact of such non-allotment will be continuous and there is no prospect of remedying the situation by the voluntary act of the party responsible for the wrongful act and therefore, the CLB is bound to interfere by an appropriate order under Section 397 of the Act, as held in Stridewell Leathers (P) Limited v. Shoe Specialities (P) Limited (supra). The High Court of Calcutta in Tea Brokers (P) Ltd. v. Hemendra Prasad Barooah (supra) held that even a single act done on one particular occasion, if the effect will of a continuing nature the member concerned is deprived of his rights and privileges for all time to come future, such an act is held to be harsh and burdensome and amounts to an act of oppression to the member concerned. Any issue of further shares in a closely held company at the detriment of a part of the shareholders is considered to be an act of oppression by this Board in Deepak C. Shriram v. General Sales Limited (supra). This Board, in Binod Kumar Agarwal v. Ringtong Tea Co. (P) Ltd. (supra) categorically held that whenever the further issue shares is found to be oppressive, the oppression to be redressed and in S.T.Ganapathy Mudaliar v. S.G. Pandurangan (supra) cancelled the allotment of additional shares made in a family company to certain shareholders in exclusion of others. In the present case, it is to be observed that father of the petitioner Nos. 1,3& 4, was a subscriber to the memorandum of articles of association of the Company and one of the first directors, but his family members were excluded by the respondents for allotment of the rights shares. This conduct of the respondents is found to he burdensome, harsh and wrongful, as envisaged Shanta Prasad Jain v. Kalinga Tubes Ltd. (supra) to meet the requirements of Section 397 and therefore, there is just and equitable cause for winding up the Company. However, the Company with huge profits an4 surplus reserves, if it is to be wound up would unfairly prejudice the shareholders of the Company, which is one of the requirements of Section 397, as affirmed in Hanuman Prasad Bagri v. Bargress Gereals Pvt. Ltd. (supra). The conduct of the petitioners, as reflected in the proceedings before this Board and in other civil and criminal litigations in other courts, in my considered view, would not disentitle them from enforcing their legal rights for further issue of shares in the Company.

The purported acts of mismanagement set out in para 1 hereinabove, whether warrant interference of this Bench, as sought by the petitioners is required to be examined.

L.V. Prasad, founder of the Company, during his life time was primarily managing its affairs. After the demise of L.V.Prasad, because of the litigation regarding the will left by L.V.Prasad, the company was managed by an interim board with effect from 08.09.1995 under the chairmanship of a retired High Court Judge and some of the petitioners were directors on the board, until the proceedings before me High court came to an end.By virtue of an order of the Court, me Company's accounts for a period of seven years between 31.03.1994 and 31.03.20.00 were admittedly adopted at the annual general meetings held on a single day, viz., 17.07.2002. The delay in convening the annual general meetings resulted on account of the court litigations cannot exclusively be attributed to the respondents and construed as an act of mismanagement in the affairs of the Company.

The detail of sale of raw silver are admittedly reflected under the head "Miscellaneous Receipts" in the profits and loss account of the Company for the years ended between 31.03.1993 and 31.03.2000. It is on record that the board of directors of the Company including the third petitioner under the Chairmanship of a retired High Court Judge at the meetings held on 02.01.1996, 26.02.1996, 17.05.1996, 28.06.1996 and 22.07.1996 deliberated the agenda relating to raw-silver stock and wastage account including the new procedure for accounting wastage of raw silver as well as films; and taken appropriate decisions. Accordingly, the board of directors resolved to implement the new method of maintaining raw silver and film stock wastage under the head "sale of by products/scrap" with effect from 01.071996. Thus, the third petitioner is a party to the decision of the board of directors for the change in accounting system in relation to sale of raw silver. Hence, the petitioners cannot have any grievance on this account. The mere plea that the sale of raw silver and film was not accounted for nine years from 1983 to 1992 and, therefore, siphoned of by the respodents, without any, proof of such misapprppriation does not merit any Consideration, after a lapse of more than a decade. The qualifications of the statutory auditors in realetion to non-reconcilination of quantity of raw films sold and purchased and non-confirmattion of balances by the debts and creditors existed even when the third petitioner was on the board of the Company. Mere suspicion of the petitoners that "In the absence absence of reconciliation of raw films sold and bought from the customers, there was reason to believe that the Company has made sales and purchases, which were not obviously brought into books accounts resulting in siphoning of huge amounts" in the absence of any concrete material does not warrant the CLB's interference.

The petitioner's firm belief that the respondents have not obtained confirmation of balances from debtors, since they have already collected all the amounts from the debtors and siphon of the amounts not being specific, lacks details. The petitioners only apprehend that the respondents have removed many valuable assets belonging to the Company, in view of the fact that the fixed assets register has not been brought up to date, but such apprehension remains unsubstantiated.

The grievance of the petitioners in regard to writing off of huge amounts as bad debts must be seen in the light of various minutes of the board of directors of the Company. The board of directors at the meeting held on 07.11.1995, 16.11.1995, 29.11.1999 and 09.12.1995 discussed and approved the bad debts, to be written off. Thus, the bad debts were written after due application of mind of the board of directors of the Company including the third petitioner.The petitioners cannot have any cause for their grievances. The decision of the board of directors to write off bad debts, being a commercial decision, does not warrant any judicial interference.

The appointment of the second respondent as the Managing. Director and the respondent Nos. 3 and 4 as whole-time directors and the advances made to directory and entities, where doctors are either directors or partners, all purportedly in violation of the provisions of the Act. It shall be borne in mind that in the absence of any proof that the acts complained of have been designed to injure the the petitioners in their rights as shareholders, as held in Ramashankar Prosad, v. Sindri Iron Foundry (P) Ltd. (supra) and without any loss having been suffered by the Company on account of these alleged acts cannot constitute mismanagement in the affairs of the Company. The plea of massive fraud on the Company sans details and is not establised.

The Company admittedly provided depreciation at the rate prescribed under the Income Tax Act. Any purported violation of the provisions of the Act, in the matter of depreciation, it is open to the statutory authority to initiate penal action against the Company and its officers in default. The non-insurance of the Company's assets in the year 1993-94, which resulted in loss, due to fire is being raised after a decade cannot in any way amount to an act of mismanagement, more so, when it is past transaction.

All alleged acts of mismanagement are either past and concluded transactions or deliberated and appropriately dealt with by the board of directors, including the third petitioner or mere apprehensions without any basis or statutory violations or the petitioners are parties to such acts or qualifications in the auditors' report, as the case may be. This Board in The Andhra Pradesh State Civil Supply Corporation v. The Delta Oil Ltd. & Fats Ltd. (supra), declined to invoke the jurisdiction of Section 235 on the basis of a mere statement of facts based on the auditors' report without any corroborative evidence: Mere technical violations may be dealt with other relevant provisions of the Act as held in Chandrika Prasad Sinha v. Bata India Limited (supra). This Board, while exercising the powers under Section 235 in Rohinten Mazda v. Hypoids (India) Private Limited (Supra) came to the conclusion that an order of an investigation cannot be made on mere suspicion or surmises without proper materials to enable the Bench to form an opinion that the affairs of the company are required to be investigated This Bench is not, thererfore, obliged to appoint an inspector for the purposes of the investigation, in exercise of the powers under Section 235 of the Act. By virtue of Clause (b) of Section 237, the CLB may take the initiative for ordering an investigation suo-motu or on the application information supplied by any shareholder or other person. Though, the petitioners have not invoked Section 237(b), yet if the CLB is satisfied that the circumstances of the present case suggest any of the things specified in Clauses (i),(ii)or(iii) then an investigation can be ordered into the affairs of the Company, as held in Barium Chemicals Ltd. v. Company Law Board (supra). The reported acts of mismanagement, by and large being concluded transactions and the petitioners are parties to such transactions do not reasonably suggest that the business of the Company is being conducted with intent to defraud its creditors, members or any other persons or otherwise for a fraudulent or unlawful purpose, or in a manner oppressive of any of its members or that the company has been formed for any fraudulent or unlawful purpose or that the respondents have been guilty of fraud, misfeasance or other misconduct or that the members of the company have not been given the requisite information with respect to its affairs, so as to invoke the jurisdiction under Section 237(b), as re-enforced in Rohtas Industries Ltd. v. S.D. Agarwal (supra); Modi Industries Ltd. v. Union of India (supra) and His Highness Marthanda Varma v. Ravel Tours and Travels Private Limited (supra) and Ashoka Marketing Limited v. Union of India (supra).For these reasons, the decision in Aditya Sharda v. Rangoli Texdye Private limited (supra) does not go in aid of the petitioners. The present company petition discloses merely which are apparent from the qualifications of the statutory auditors made in their report forming part of the balance sheet of the Company at the relevant point of time, which without at least prima facie evidence sustaining the alleged acts of mismanagement would not lead to the conclusion that an investigation is necessary as held in Delhi Flour Mills Co. Limited, In re (Supra). The Kerala High Court in Mrs. U.A. Sumathy v. Digvijay Chit Fund (P) Ltd. (supra) held that no investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the Company's business is being carried on.The Company is admittedly is a profit making one with huge reserves and surpluses. The issue as to whether (a) the incorporation of the proposed respondent No. 6 by the respondent Nos. 2 & 3; or (b) the investment of Rs. 15 crores made by the Company by way of preference shares in the proposed respondent No. 6 or (c) the counter guarantee given securing the liabilities of the proposed respondent No. 6 warrants any investigation is separately being considered. The respondents are opposing the application (C.A. 20/2005) to amend the company petition for impleadment of the proposed respondent Nos. 6 & 7 mainly on the ground that there are no allegations in the company petition in regard to the alleged diversion of funds to the proposed respondent No. 6 and the investments in proposed respondent No. 7 by the Company, in support of which Shri T.K. Seshadri, Learned Senior Counsel relied upon the decision of the Orissa High Court in N.K. Mohapatra v. State of Orissa (supra). The High Court while considering the maintainability of the application for amendment of the company petition held thus:

The power to allow an amendment is undoubtedly wide and may at any stage be appropriately exercised in the interest of justice, the law of limitation notwithstanding. But exercise of such far-reaching discretionary power is governed by judicial considerations, and wider the discretion, greater ought to be the care and circumspection on the part of the court. All amendments will be generally permissible when they are necessary for determination of real controversy in the suit. All the same, substitution of one cause of action or the nature of the claim for another in the original plaint or change of subject-matter of or controversy in the proceeding is not permissible. The amendment sought for in present case precisely intends to do so. Therefore, the prayer for amendment deserves to be rejected.

It is free from doubt that while the power to allow the amendment is wide, yet such power if results in substitution of one cause of action for another or change of subject matter in the proceedings shall not be permitted. In the case, before the Orissa High Court the application was originally filed under Section 391/395 read with Section 634 was sought to be read, by an amendment application, as one filed under Section 397, 398 and 402. Therefore, the prayer for amendment came to be rejected by the High Court. The petitioners herein in support of their claim that the Company's funds have been diverted by the respondents, furnished in the rejoinder the incidence of the huge investments made by the Company in the proposed respondent No. 6, which would not strictly amount to substitution of one cause of action for another or change of the subject matter of the company petition. Therefore, the decision of the Orissa High court has no application to the facts of the case before me. At this juncture, the decision in Binod Kumar Agarwal v. Ringtong Tea Co. (P) Ltd. (supra) assumes relevance, wherein it has been held that "if anything is lacking in the petition, it may be made good by the subsequent affidavits and, therefore, it is necessary for the Board to consider the entire evidence that is placed before it in order to do justice between the competing rights of the parties. The case of justice will not suffer if reliefs are granted after the consideration of all evidence before the Board, even though the original plaint is lacking in particulars.'' While it is so, there is no bar to consider the grievances of the petitioners in regard to the alleged diversion df funds in the light of the records already made available before the Bench. The board of directors of the Company, while presenting the 44th annual report and the audited balance sheet as at 31.03.2001 together with profit and loss account, made inter-alia, the following statements :-

During the year under review, your company successfully participated in the competitive bid for establishing an IMAX large format film theatre floated by the Government of Andhra Pradesh as a "Tourism Development" initiative. The project envisages an 2D/3D IMAX Theatre and related entertainment facilities, comprising a multiplex of 4 screens, family entertainment center and shopping. The project was awarded to your company in October, 2000. The estimated project cost is Rs. 6100 Lakhs and the Industrial Development Bank of India and Andhra Bank have expressed their willingness to provide financial assistance of upto Rs. 3000 Lakhs for financing the project. Your Directors have floated a new company namely Prasad Media Corporation Ltd. for implementing the project.

The above statements from the board of directors clearly reveal that the Company successfully participated in the competitive bid for establishing an IMAX Theatre Project floated by the Government of Andhra Pradesh and that the project was awarded to the Company in October, 2000. This is brought out by a copy of the Government order dated 19.10.2000 of Government of Andhra Pradesh awarding the project in favour of the Company, produced belatedly by the petitioners and, therefore, no reliance is being placed for the present on this piece of document. Nevertheless, it is far from doubt that the directors unequivocally made it clear that the Company was successfully awarded the IMAX Theatre Project by the Government of Andhra Pradesh. The statement that "your directors have floated a new company, viz., Prasad Media Corporation Ltd." for implementation of the project must necessarily imply that it is only the Company that incorporated Prasad Media Corporation Ltd.. In this connection, the directors' report submitted while presenting the 46th annual report assume greater importance, the relevant portion of which reads as under:-

The investment of Rs. 2,061 Lakhs with Prasad Media Corporation Ltd., Hyderabad (a Company under the same management) to commence the Imax Theatre as mentioned in out earlier year's report, has been appropriated towards 1,50,00,000 -11% cumulative redeemable preference shares of Rs. 10/- each amounting to Rs. 15 Crores and the balance of Rs. 561 Lakhs has been shown under the head "other Advances ", in which the share application money of Rs. 546 Lakhs has been included. Your Company has also given a counter-guarantee for the loan obtained by the said Prasad Media Corporation Ltd., Hyderabad, from Industrial Development Bank of India, Andhra Bank, Indian Overseas Bank and UCO Bank, to the extend of Rs. 5,450 Lakhs.

The directors have made a categorical statement that the Company made the investment with Prasad Media Corporation Ltd., Hyderabad,"a company under the same management". The plea of the respondents that the balance sheet of the Company for the year 2000-2001, 2001-2002 and 2002-2003 clearly speak of the investments made by the Company in Prasad Media Corporation Ltd., prima facie, does not justify the incorporation of Prasad Media Corporation Ltd. exclusively by the respondents 2 & 3. Moreover, the investment in 11% cumulative redeemable preference shares amounting to Rs. 10 crores in the proposed respondent Nos. 6 is found to be approved at the board meeting held on 29.03.2003 and the petitioners could not be attributed any knowledge of this investment decision by the board of directors of the Company. It is, therefore, absolutely necessary to ascertain (a) whether the incorporation of the proposed respondent No. 6 by the respondent Nos. 2 & 3; (b) whether the investment of the Company in the preference shares of the proposed respondent No. 6 and (c) the counter guarantee given by the Company securing the liabilities of the proposed respondent No. 6 will amount to an act of mismanagement/diversion of funds or not, before which the proposed respondent No. 6 must be given an opportunity of hearing on these contentious issues. In view of this, the proposed respondent No. 6 must be arrayed as a party to the company petition. The applicability or otherwise of the decisions regarding fiduciary duty of a director dealt in Charles G. Guth and The Grace Company, Inc., of Delaware v. Loft, Incorporated and Canadian Aero Service Ltd. v. O'Malley et al (supra) cited by Shri Datar, learned Senior Counsel to the facts of the present company petition, will arise only on hearing the version of Prasad Media Corporation Ltd. The prayer for the impleadment of the respondent No. 7 is declined, in view of the fact that it is a subsidiary of the Company and,: therefore, the investments made by the Company in its subsidiary company, whether would amount to diversion of funds could be considered in the absence of the proposed respondent No. 7, but after hearing the Company in this behalf.

9. In view of the foregoing conclusions and in exercise of the powers under Section 402, I order as under:-

a) The second respondent would transfer, out of his shareholding in the Company, 22,921 shares in favour of the first petitioner; 313 shares in favour of the second petitioner; 23,216 shares in favour of the third petitioner and 5,956 shares to the fourth petitioner within 15 days of receipt of the consideration from the petitioners at the rate of Rs. 100/- per share, which shall be remitted by them by 14.10.2005 and, thereafter, the second respondent shall deliver the original share certificates and the instruments of transfer to the petitioners in terms of this order.

b) The Company will register the transfer of shares in favour of the petitioners within 30 days of due lodgement of the share certificates and the instruments of transfer by the petitioners.

c) Prasad Media Corporation Ltd. shall be arrayed as the respondent No. 6 in the company petition and shall answer the charges levelled in relation to it by 14.10.2005 and rejoinder be filed by 31.10.2005.

d) The Company shall file additional reply on its investments in Prasad Film Labs (Mumbai) Private Limited by 14.10.2005 and rejoinder if any, to be filed by 31.10.2005.

With the above directions, both the company petition and the company application (CA No. 20/2005) stand disposed of, however, reserving the right to issue appropriate directions on the charges made against the respondents in the matter of (a) Prasad Media Corporation Ltd. and (b) Prasad Film Labs (Mumbai) Private Limited. Towards this end, the matter will be called on 07.11.2005 at 2.30 p.m. No order as to costs.