Company Law Board
Pucci Dante vs Rafeeque Ahmed And Anr. on 15 July, 1998
Equivalent citations: [1999]95COMPCAS566(CLB)
JUDGMENT
K.K. Balu, (Member)
1. This is a petition filed under Section 186 of the Companies Act, 1956 (hereinafter referred to as "the Act"), seeking directions of this Bench against Grace Shoes Private Limited (hereinafter referred to as "the company") to convene an extraordinary general meeting of the company to transact the following business :
(a) to restructure the management of the company ;
(b) to appoint internal auditors ;
(c) to open a bank account and (d) to consider any other allied issues.
2. The facts of this case as stated in the petition and reiterated by Mr. Thomas Dilip Singh, counsel for the petitioner are that the second respondent-company was incorporated under the provisions of the Act on November 6, 1995, to carry on business in shoes. The first respondent and one Mr. Faiz Mohammed, are subscribers to the memorandum and articles of association of the company each subscribing to 100 shares of Rs. 10 each. Being subscribers to the memorandum and articles of association, the first respondent and Mr. Faiz Mohammed, became the directors on incorporation of the company. The Government of India, Ministry of Industry, granted permission in favour of the company to obtain foreign equity participation from Italy, upon which, Pucci SRL of Italy subscribed to 9,00,000 equity shares of Rs. 10 each, accounting for 90 per cent, of the equity share capital. Pucci SRL is represented by the petitioner, being its president. Though the remaining 10 per cent, of equity share capital was held by the first respondent the amount for acquiring the shares in favour of the first respondent was advanced by Graziella Shoes Private Limited in which the petitioner is a director and investor. The first respondent is not the beneficial owner of 10 per cent, shares. Besides the share capital contributed by Pucci SRL, Pucci SRL advanced an amount of Rs. 4,14,06,228 by way of payments towards imports by the company and Rs. 1,19,72,000 by way of unsecured loans. In the circumstances, the petitioner alone has a stake in the company and neither has the first respondent nor Mr. Faiz Mohammed. The factory was commissioned at Vellore on March 28, 1996. The goods were exported to buyers in Europe. While the petitioner was mainly concerned with the production as well as marketing, the day-to-day administration was looked after by the first respondent. There used to be periodical meetings of the company from time to time to discuss various issues relating to the management of the company. The first respondent was responsible for maintenance of the statutory and other records along with his responsibilities. During the visit of the petitioner to India on December 16, 1997, he came to know of irregularities and acts of commission and omission on the part of the first respondent which were discussed in an informal meeting held on December 19, 1997, at the factory premises of the company. At the said meeting, several differences of opinion arose between the petitioner and the first respondent which were left unresolved and the meeting ended with both the petitioner and the first respondent deciding to part ways. Thereafter, the first respondent stopped attending the factory at Vellore and became belligerent. The first respondent misappropriated huge amounts of money belonging to the company upon which the petitioner caused a lawyer's notice threatening to lodge a criminal complaint against the first respondent. The disputes between the petitioner and the first respondent had created a serious deadlock in relation to the management of the company causing enormous loss. In the situation, the administration of the company was totally paralysed.
3. The company has adopted the regulations contained in Schedule I, Table "A" of the Act so far as applicable to the private company. Regulation 48 provides that any director or any two members may call an extraordinary general meeting in the same manner as may be called by the board. Pucci SRL, as a majority shareholder, by letter dated February 9, 1998, sent a requisition to the company to convene an extraordinary general meeting under Section 169 of the Act for (a) restructuring the management of the company, (b) opening a bank account, and (c) appointing internal auditors. Thereafter, the petitioner as a director, by letter dated February 11, 1998, requested the company to convene a meeting of the board of directors of the company on February 20, 1998, at Chennai to consider the requests of Pucci SRL. In spite of the letter dated February 11, 1998, of the petitioner, the first respondent wilfully and deliberately avoided attending the board meeting convened on February 20, 1998. As there was no quorum in the board meeting held on February 20, 1998, no business was transacted in respect of the requisition of Pucci SRL. Mr. Faiz Mohammed already ceased to be a director and relinquished his interest in respect of his 100 shares in favour of the petitioner. Consequently, the first respondent is only the other share holder and director, apart from the petitioner. Though the requisitionists themselves are empowered to convene an extraordinary general meeting it would be a futile exercise, especially when the first respondent, being the only other shareholder wilfully refuses to attend the meeting. It has become impracticable from a reasonable point of view to convene a meeting of the company compelling the petitioner to invoke the provisions of Section 186. The Company Law- Board must take a practical view of the matter. In this connection, counsel for the petitioner relied on the following decisions :
(a) El Sombrero Ltd., In re [1958] 28 Comp Cas 619 ; [1958J 3 All ER 1 (Ch D) to state that :
". . . the word 'impracticable' is more limited than the word 'impossible' and that if the desired meeting of the company could not be conducted as a practical matter, in accordance with the articles of association, the company had jurisdiction under Section 135(1) of the Companies Act, 1948, to order a meeting to be held notwithstanding opposition by the shareholders other than the applicant.
(b) Indian Spinning Mills Ltd. v. Madan Shumshere Jang Bahadur [1952] 22 Comp Cas 162, 167 ; AIR 1953 Cal 355, to state that :
". . . the term 'impracticable' implies that it is impracticable from a reasonable point of view. The court must take a common sense view of the matter and must act as a prudent person of business."
(c) Pasari Flour Mills Ltd., In re [1962] 32 Comp Cas 896 ; AIR 1961 MP 340 to state that :
". . . if the court finds that it has become 'impracticable' to call a meeting in the ordinary manner it can make an order under Section 188 of the Companies Act that the meeting be held. In making such an order the court need not consider which of the parties is responsible for the disputes or is acting in a high-handed manner. 'Impracticable' in this connection does not mean impossible."
(d) Ruttonjee and Co. Ltd., In re [1970] 40 Comp Cas 491 ; [1968] 2 Comp LJ 155 (Cal) to state that :
". . . under Section 186, the court in the exercise of its discretion calls a meeting of the company. Secondly, the court must be satisfied that it is for any reason 'impracticable' to call a meeting in any manner in which meetings of the company may be called. Thirdly, the court has no power to call an annual general meeting".
(e) Amrit Kaur Puri (Smt.) v. Kapurthala Flour, Oil and General Mills Co. (P) Ltd. [1997] 1 Comp LJ 147 (CLB) to state that (headnote) :
". . . on the facts and circumstances of the case, however, calling, holding conducting of an extraordinary meeting having become impracticable, it was considered proper to proceed under Section 186 of the Companies Act, so as to put the company on the rails so that it could function with a duly constituted board of directors after recognising the legal heirs of the deceased members".
Counsel for the petitioner further relied on the commentaries by Palmer on Company Law (Vol. 1 page 583) to state that :
". . . if it is impracticable to call a meeting or to conduct it in the manner prescribed by the articles^ the court may, either on its own motion or on the application of a director or any member entitled to vote, order a meeting to be called, held and conducted in such a manner as the court thinks fit, and may direct a 'meeting' of one member."
4. While concluding his arguments, counsel for the petitioner urged that the petitioner need not exhaust his remedy under the provisions of Section 169, which is independent of Section 186. It is in these circumstances, he sought for suitable directions against the company to convene an extraordinary general meeting to transact the business specified in the requisition dated February 9, 1998, fixing the quorum as one member at such meeting.
5. According to the first respondent and his counsel, Shri R. Sankaranarayanan, the petitioner, first respondent and one Mr. Faiz Mohammed, are members of the company. Both the first respondent and Mr. Faiz Mohammed subscribed to 100 shares each at the time of subscribing to the memorandum of association. Mr. Faiz Mohammed has not transferred his shares and continues to be a member, who can attend the extraordinary general meeting of the company. The provisions of Section 186 can be invoked only when it is impracticable to call any meeting other than an annual general meeting. In the present case, there has been no reason that it is impracticable to call a meeting of the company in accordance with provisions of the Act and without recourse to the proceedings before the Company Law Board. The impracticability has to be viewed from the point of view of a prudent businessman and inter rivalry between groups of shareholders or two directors cannot be a ground to seek any remedy under Section 186. The requisition dated February 9, 1998 of Pucci SRL for convening an extraordinary general meeting under Section 169 of the Act without any resolution of Pucci SRL, is not valid. The requisitionists themselves are empowered to convene a meeting as contemplated by Section 169, which they failed to do. Mr. Faiz Mohammed and Pucci SRL are not made parties to the petition. The petition is, therefore, bad for non-joinder of proper and necessary parties.
6. There has not been any misappropriation of the company's funds by the first respondent. A sum of Rs. 20 lakhs was drawn from the account of the company periodically with the consent of the petitioner to buy land at Vellore for construction of a house for the first respondent. The said sum of Rs. 20 lakhs would be adjusted in future sharing of profits. After the unit was put into operation the petitioner wanted to dispense with the services of the first respondent. The petitioner desired to shift the unit to Madras in order to help himself and his wife who had incorporated Graziella Shoes Private Limited in MEPZ, Madras. The petitioner had convened the meeting in order to remove the first respondent from the board. The first respondent was attending the meetings conducted by the company from time to time save the one held on February 20, 1998, for personal reasons. In the circumstances, it cannot be said that it was impracticable to convene a meeting of the company. In support of his views, Shri R. Shankaranarayanan relied on :
(i) Ruttonjee and Co. Ltd., In re [1968] 2 Comp LJ 155 ; AIR 1969 Cal 551 ; [1970] 40 Comp Cas 491 recapitulating the main principles in trying an application under Section 186, which are as under (headnote of 40 Comp Cas) :
"1. The court would not ordinarily interfere with the domestic management of a company which should be conducted in accordance with its articles.
2. The discretion granted under Section 186 should be used sparingly and with caution so that the court does not become either a shareholder or director of the company trying to participate in the internecine squabbles of the company.
3. The word 'impracticable' means impracticable from a reasonable point of view.
4. The court should take a common sense view of the matter and must act as a prudent man of business.
5. A prudent man of business has not a sensitive officious view of intervention in case of every rivalry between two groups of directors ; prudence demands that the court should ordinarily keep itself aloof from participating in quarrels of rival groups of directors or shareholders.
6. But where the meeting can be called only by the directors and there are serious doubts and controversy as to who are the directors or where there is a possibility that one or other or both the meetings called by the rival groups of directors may be invalid, the court ought not to expose the shareholders to uncertainties and should hold that a position has arisen which makes it 'impracticable' to convene a meeting in any manner in which meetings of the company may be called.
7. The court should exercise its power under Section 186, when upon considering all the facts and circumstances of case, it can with a reasonable approach to certainty or even prima facie that a meeting called in the manner in which meetings are ordinarily called under the Act or under the articles, would be invalid.
8. Before the court exercises its discretion under Section 186, the court must be satisfied when a director or a member moves an application, that it has been made bona fide in the larger interest of the company for removing a deadlock otherwise irremovable."
(ii) Al-Amin Seatrans Ltd. v. Owners and Party Interested in Vessel M.V. Loyal Bird, AIR 1995 Cal 169,181, to state that :
". . . the secretary of the company by himself had no power to issue notice calling any general meeting or extraordinary general meeting and the articles of association did not give him any power to do so.
The notice itself was void and of no effect . . . Any meeting held pursuant thereto is also null and void".
7. He further submitted that the decisions cited by counsel for the petitioner are inapplicable on the facts and circumstances of the present case especially when there have been circumstances like litigation among parties, non-holding of a meeting for a long period etc., in the cases cited on behalf of the petitioner making it impracticable for convening a meeting of the company. The petitioner has not made out any case of impracticability in convening a meeting. Moreover, the first respondent is ready and willing to attend the board meeting, if convened by the company. An extraordinary general meeting can be convened by sending notices to the members, i.e., the petitioner, first respondent and Mr. Faiz Mohammed. It cannot be presumed that Mr. Faiz Mohammed would not attend the meeting. It is, therefore, practicable to convene a meeting of the company in accordance with the articles of association of the company. In the circumstances, counsel for the first respondent prayed for dismissal of the petition.
8. I have considered the pleadings and arguments of both counsel. The question for consideration is whether the petition meets the requirements of Section 186 of the Act.
9. Section 186 provides that if for any reason, it is "impracticable" to call a statutory meeting or an extraordinary general meeting according to the provisions of the Act or articles, the Company Law Board may, either on its own motion or on the application of any director of the company, or any member thereof entitled to vote at the meeting, direct calling of a meeting and give directions therefore. It is, therefore, clear that either a director or a member of the company entitled to vote at the meeting can file an application under Section 186. Secondly, it should be impracticable to call an extraordinary general meeting of the company. Unless these two conditions are met, no petition will lie under Section 186 of the Act.
10. There is no dispute as to whether the petitioner is a director of the company. The petitioner is admittedly one of the directors. Therefore, this question does not arise for consideration by this Bench.
11. With regard to the issue whether it is impracticable to call an extraordinary general meeting of the company, the relevant facts and circumstances of the case shall be looked into. Article 2 of the articles of association of the company provides that the regulations contained in Schedule I, Table "A" of the Act so far as applicable to the private company shall apply to the company. Regulation 48 provides that the board may, whenever it thinks fit, call an extraordinary general meeting. It further provides that any director or any two members of the company may call an extraordinary general meeting in the same manner as may be called by the board. Pucci SRL, major shareholder of the company, holding more than 10 per cent. of the paid up capital represented by its president by a requisition dated February 9, 1998, requested the board of directors of the company to convene an extraordinary general meeting under Section 169 of the Act to consider the business specified therein. Pucci SRL possessing the requisite shareholding is empowered to convene a meeting by virtue of sub-section (6) of Section 169 of the Act. But according to the first respondent, the requisition dated February 9, 1998, has to be rejected in the absence of a specific resolution of Pucci SRL. Counsel for the first respondent at the time of arguments challenged the validity of the requisition by making a reference to Al-Amin Seatrans Ltd. v. Owners and Party Interested in Vessel M.V. Loyal Bird, AIR 1995 Cal 169. I find difficulty in accepting the contentions of the first respondent that the requisitionists themselves are empowered to convene a meeting as contemplated in Section 169. In these circumstances, it may not be prudent and practicable from a reasonable point of view to convene an extraordinary general meeting by Pucci SRL under Section 169 in pursuance of the requisition dated February 9, 1998, the validity of which itself is disputed. Perhaps, the calling of a meeting by the requisitionists would inevitably cause more litigation and confusion and further embitter the feelings between the parties.
12. The first respondent as a director did attend the meetings of the company convened from time to time. In the first meeting held on November 6, 1995, the matters relating to foreign equity participation, lease of factory premises, appointment of auditors, opening of bank account, remuneration of directors were considered. In the extraordinary general meeting held on July 31, 1996, the authorised capital of the company was increased from Rs. 25 lakhs to Rs. 2.5 crores, In the meeting held on August 23, 1996, resolution was passed to shift the registered office of the company. The resignation of Mr. Faiz Mohammed, as a director was accepted in the board meeting held on November 6, 1996. In the meetings held on February 6, 1997, February 19, 1997 and April 2, 1997, among other things, the progress of the company was reviewed and the accounts for the year ended March 31, 1996, were approved. At the annual general meeting held on May 2, 1997, the annual accounts for the year ended March 51, 1996, were adopted, and the reappointment of the petitioner as director of the company was approved. Several contentious issues were discussed in the meeting held at the factory premises of the company on December 19, 1997. It is, therefore, apparent that the first respondent was regular in attending the meetings save the one which took place on February 20, 1998. According to the first respondent in the reply-affidavit, the petitioner had convened the board meeting on February 20, 1998, with a one-point programme of eliminating the former. Counsel for the first respondent further urged that item No. 1 of the requisition dated February 9, 1998, relating to restructuring of the management of the company is very vague, under which, the first respondent was to be eliminated. In this connection, it is contended by the petitioner that the first respondent stopped attending the factory at Vellore subsequent to the informal meeting held on December 19, 1997, and that he became belligerent. However, it is the contention of the first respondent that he was denied entry to the factory since January, 1998. At this juncture, we are not concerned whether the first respondent voluntarily stopped attending the factory or he was prevented from attending the factory. The fact is that the first respondent is not attending the factory on account of the differences between them. There has been exchange of legal notices between the parties. According to the first respondent, the petitioner wanted to dispense with the former, with the establishment of production system, norms and quality control at the company. It is beyond doubt that all is not well between the petitioner and first respondent as borne out by the letter dated January 5, 1998, of the first respondent in favour of the petitioner. Therefore, the plea of the first respondent that he did not attend the board meeting on February 20, 1998, for personal reasons is not convincing. There is also nothing on record to substantiate the same.
13. With regard to Mr. Faiz Mohammed, counsel for the petitioner conceded that Mr. Faiz Mohammed, continues to be a member. However, it has to be seen whether it will be practicable to convene an extraordinary general meeting by sending notice to the shareholders including Mr. Faiz Mohammed. It is specifically contended by the first respondent in reply affidavit that Mr. Faiz Mohammed had to resign on account of ill-treatment meted out to him by the petitioner. Mr. Faiz Mohammed was asked to quit as a director and he could not bear the insults thrown at him and he quit the post on his own accord. It is, thus, seen that the relationship between Mr. Faiz Mohammed, and the petitioner is also not cordial. The fact remains that there are factions. Taking a common sense view of the strained relationship between the petitioner and Mr. Faiz Mohammed, it remains to be seen whether the latter will cooperate with the petitioner in convening an extraordinary general meeting.
14. Pucci SRL is admittedly holding equity shares of Rs. 90 lakhs which represents about 90 per cent. of the share capital of the company. In addition, Pucci SRL extended substantial sums by way of loans to the company, the fact of which has not been denied by the first respondent. There has been a serious deadlock in relation to the management of the company. In the circumstances, the larger interests of the company shall primarily be seen for removing the deadlock in the management of the company, as laid down in Ruttonjee and Co. Ltd., In re [1968] 2 Comp LJ 155 ; [1970] 40 Comp Cas 491 ; AIR 1969 Cal 551.
15. On the facts and circumstances of the present case, where there are serious disputes among the petitioner on the one hand and the first respondent as well as Mr. Faiz Mohammed on the other hand, the first respondent and Mr. Faiz Mohammed have an insignificant stake in the company when compared to the petitioner ; the requisition dated February 9, 1998, of Pucci SRL is under dispute and there is a serious deadlock in relation to the management of the company and also taking a reasonable, prudent and common sense view of the whole of the matter. I am satisfied that it may be impracticable to call, hold and conduct an extraordinary general meeting of the company. Accordingly, in my considered opinion, in the present case, there is need to exercise my discretion under Section 186. It is in these circumstances and in the light of the principles enunciated in various decisions cited supra as well as the unequivocal statement made by counsel for the first respondent, that he is ready and willing to attend the board meeting, if convened by the company, it is hereby directed that a board meeting shall be convened to fix a date for an extraordinary general meeting to transact the specified business. If no board meeting could be called, held or conducted for want of quorum or otherwise it is further directed that an extraordinary general meeting shall be held after proper notice to the shareholders to transact the business as contained in the requisition dated February 9, 1998, and that one member of the company present in person or by proxy shall be deemed to constitute a quorum at such meeting. In the circumstances, I do not propose to go into the merits of the other contentions of the parties.
16. With the above directions, the petition stands disposed of. No order as to costs.