Company Law Board
Ansar Khan And Kalimulla Shariff vs Finecore Cables Private Limited, ... on 5 October, 2006
ORDER
K.K. Balu, Vice-Chairman
1. The petitioners collectively holding in excess of one-tenth of the issued share capital of M/s Finecore Cables Private Limited ("the Company"), aggrieved on account of certain purported acts of oppression and mismanagement in the affairs of the Company namely - illegal (a) transfer of shares in the name of the second respondent, thereby converting the petitioners into minority shareholders; (b) removal of the petitioners from the office of director; (c) appointment of the third respondent as a director; (d) convening of the board meetings without the required minimum quorum and (e) non-sending of notices to the board and general meetings of the Company have invoked in the present petition the provisions of Sections 397 and 398 of the Companies Act, 1956 ("the Act"), seeking the following reliefs:
(i) to declare that the resolutions passed at the board meeting and the extra ordinary general meeting held on 04.10.2004 and 28.01.2005 respectively are void, illegal and inoperative.
(ii) to remove the respondents 2 & 3 from the office of director and the second respondent from the office of managing director of the Company.
(iii) to restrain the respondents 2 & 3 from holding any board meeting and general meeting and further from operating any bank account of the Company.
(iv) to investigate into the affairs of the Company.
(v) to freeze the voting rights of the respondents 2&3 in respect of the shares held by them in the Company.
(vi) to take appropriate action under Section 406 of the Act against the respondents 2&3 for breach of trust, misfeasance, misappropriation and falsification of records of the Company.
(vii) to give effect to the transfer of 4815 shares of the Company, in the name of the second petitioner, in terms of the resolution dated 04.10.2004 of the board of directors and
(viii) to declare that the annul return made upto 30.09.2004 and other returns filed by the Company with effect from December 2004 with the Registrar of Companies are null and void.
2. Sri M.S. Sivasankaran, learned Authorised Representative, while initiating his arguments submitted:
* The Company was incorporated as a private limited Company in June 1989 with the main object of carrying on the business of manufacture and dealing in cables of all types and kinds and was managed by family members of R. Shariff as a family concern with mutual trust inter se the parties. The first petitioner became a director on , 09.11.2001 and continues to be a director and became the Chairman of the Company at the board meeting held on 04.10.2004. The second petitioner appointed as a director on 26.06.1992 continues to be a director and became the executive director of the Company with effect from 04.10.2004. The second respondent became the Managing Director on 04.10.2004. At the board meting held on 04.10.2004 Mr. R. Shariff, N. Shariff and Syed Ilyas had resigned from the office of director of the Company. As at 30.09.2004 the petitioners 1 & 2 were collectively holding 1712 equity shares of the Company. The second petitioner in addition to his holding, had acquired further 4815 equity shares from R. Shariff and his family members for a total consideration of Rs. 48.15 lakhs which has been paid thus: (i) A sum of Rs. 4,00,000/- made on 19.06.2004 to N. Shariff, A/c Unique Enterprises; (ii) An amount of Rs. 18,00,000/- by way of loan withdrawal by R. Shariff, (iii) An amount of Rs. 3,00,000/- by way of cheque drawn in favour of R. Shariff given on 04.10.2004 by the first petitioner; and (iv) An amount of Rs. 23.15 lakhs paid by Unique Associates on 04.10.2004 to R. Shariff on behalf of the second petitioner. The second petitioner had obtained the share certificates together with the transfer deeds from the transferors, upon which the transfer of these shares was approved in his name at the board meeting held on 04.10.2004. The shareholding of the second petitioner pursuant to acquisition of 4815 equity shares got enhanced to 5218 shares representing 65.61% of the paid up share capital of the Company. Though, the transfer of 4815 shares in the name of the second petitioner was approved at the board meeting held on 04.10.2004, the second respondent failed to despatch the share certificates, after effecting necessary endorsement thereof in the name of the second petitioner, in spite of repeated demands made by him.
* According to the second respondent, at the board meeting held on 30.09.2004, 3088 shares out of 4815 shares were transferred in the name of the respondents 2 & 3. But the original minutes dated 30.09.2004 did not contain any approval for the transfer of 3088 shares in their favour which came to be unauthorisedly substituted at a later point of time. When the second petitioner by his letter dated 04.02.2005 questioned the transfer of shares in favour of the second respondent there has been no response whatsoever from him. The board of directors never approved the transfer of shares in favour of the second respondent at the board meeting held on 30.09.2004. The minutes presently produced by the second respondent containing the resolution in relation to the approval for the transfer of shares in the name of the second respondent are concocted and fabricated. The minutes of the annual general meeting dated 30.09.2004 produced for authentication before the Commissioner are different from the minutes of the general meeting signed by the then Chairman of the meeting. Though, the meeting was convened on 30.09.2004 at 9.00 AM, the minutes show that the meeting was held at 12.30 PM. The signature of the then Chairman contained in the minutes of the annual general meeting produced before the Commissioner appears to have been forged and therefore, no reliance can be placed on the minutes of the annual general meeting produced by the second respondent before the Bench. The first petitioner had signed the annual return made upto 30.09.2004 and handed over the same to the Company for filing with the Registrar of Companies, but the annual return produced for authentication before the Commissioner was entirely different from the annual return- signed by the first petitioner. The annual return produced before the Commissioner by the second respondent was signed not by any shareholder or director and the shareholding pattern shown therein is contrary to the actual shareholding pattern which was prevalent as at 30.09.2004.
* The second respondent fabricated the minutes of the board meeting dated 04.10.2004 taking advantage of the loose leaf system of maintaining the minutes book, by insertion of several items therein. Those items were neither transacted nor approved by the board of directors. There was only one board meeting on 04.10.2004 attended by all the directors of the Company including those who had resigned from the office of director. The claim of the respondent that there was first meeting with the entire board, and later on the same date the board meeting was continued by the remaining directors other than those who had resigned from the board by way of a second meeting is totally false. The alleged minutes of the so called first meeting is a fabricated and concocted one.
* By virtue of the resolution passed at the board meeting held on 04.10.2004 any of the two directors namely the petitioners 1 & 2 and the second respondent were authorized to operate the bank account. The first petitioner is residing at Bangalore, while the second petitioner is at Mumbai and therefore, for the purpose of smooth operation of the bank account, the petitioners have caused their signature on blank cheque leaves and other documents and handed over the same to the second respondent reposing confidence and personal trust on him. However, the petitioners came to know during January, 2005 that the second respondent, as the Managing Director resorted to siphoning off funds of the Company, by making use of the blank signed cheques handed over by the petitioners and further adopted several illegal methods to mismanage the affairs of the Company.
* In the meanwhile the petitioners came to know that they were removed from the office of director at the extra ordinary general meeting purportedly held on 28.01.2005 and that the third respondent was inducted on the board of directors of the Company. The petitioners never received any notice for the alleged extra-ordinary general meeting. The meeting without notice to the petitioners is not valid and the resolutions passed at the meeting are not binding on the petitioners. The extra ordinary general meeting was reportedly convened pursuant to the notices dated 29.11.2004 and 01.12.2004 sent under Section 284 of the Act by Aejaz Mehamood and Nasrulla Shariff respectively. The notice of Aejaz Mehmood does not indicate the number of shares held by him. The register of members shows that only Aejoj Ahmed holding 30 shares representing 0.37% of the share capital of the Company is a member of the Company. The said notice refers to one N. Shariff and it is not known whether N. Shariff is a shareholder of the Company. This notice deifeats the provisions of Section 169, 173 and 188 of the Act. The notice of Nasrulla Shariff is dated 01.12.2004 but he is not at all a shareholder of the Company as on 01.12.2004 and his entire shareholding has been transferred to the second petitioner at the board meeting held on 04.10.2004. Nasrulla Shariff has no locus standi to issue any notice under Section 284, as claimed by him. The signature containing in the said notice is forged and is fabricated by the respondents to sub-serve their illegal means. There is no material to indicate as to when the notices dated 29.11.2004 and 01.12.2004 were served upon the Company. The Company did not act on the requisitions, in accordance with the relevant provisions of the Act and the requisitionists neither convened themselves the extra ordinary general meeting. Any meeting convened pursuant to the illegal notices cannot be valid and the resolutions passed at such meeting will not be binding on the Company as well as the petitioners. The removal of the petitioners without satisfying the requirements of Section 284, which are mandatory cannot be valid. Furthermore, the minutes of the extraordinary general meeting dated 28.01.2005 bear the signature of the second respondent as the Chairman, while Sayed Ilyas was the Chairman of the meeting held on 28.01.2005. The second respondent was authorised to sign the minutes only on 24.02.2005, but he had signed the minutes even on 28.01,2005. The agenda for removal of the second petitioner was proposed by the Chairman, but not seconded by any one. Though the third respondent was appointed as a director, the requisition notice does not contain any request for the third respondent's appointment as a director. Similarly, the appointment of the third respondent without convening any board meeting or general meeting can neither be valid. The removal of the petitioners from the office of director and the induction of the third respondent on the board of the Company are illegal and void. Thus, the respondents 2&3 are resorting to acts mismanagement and oppression, which are prejudicial to the interests of the Company as well as its shareholders.
* The Company's banker namely, State Bank of India, Mysore Branch by its communication dated 12.02.2005 reported that the petitioners have resigned from the board. When the petitioners expressed their concern in the matter, the banker by its communication dated 18.12.2005 contended that the petitioners were removed at the extra ordinary general meeting of the Company held on 28.01.2005. When the petitioners reiterated their stand in their communication dated 19.02.2005 that the alleged removal from the office of director without complying with the requirements of Section 284 is bad in law, the banker never responded at any point of time. Thereafter, the petitioners were constrained to file a civil suit seeking an order of injunction restraining the respondents 2 & 3 from operating the bank account maintained in the name of the Company. However, this civil suit has been withdrawn by the petitioners after approaching the CLB for appropriate reliefs in this behalf.
* No board meeting or general meeting was ever held after the board meeting of 04.10.2004 and the petitioners did not receive any notice for any of the meetings purportedly held subsequent to 04.10.2004. Any meeting without notice to the members or the directors as the case may be cannot be valid. The minutes of the board meeting purportedly held on 20.12.2004, 09.02.2005, 31.03.2005, 30.06.2005, 29.07.2005 and 31.08.2005 are fabricated documents. Though, the petitioners continue to be directors they did not receive any notice for any of the meetings held on the aforesaid dates. The notices have not been sent to the petitioners at the registered address and therefore, there cannot be any valid service of notice on them. The board meeting of 20.12.2004 was reportedly chaired by the first petitioner, but the minutes were signed by the second respondent, as Chairman of the meeting. Similarly, the extra-ordinary general meeting held on 28.01.2005 was chaired by Aejaz Mehamood, but the minutes were signed by the second respondent, as Chairman of the meeting. Hence none of the resolutions passed at any of those meetings will be valid and binding on the Company and the petitioners. The statutory records produced before the Bench are re-written and the old registers have been kept away by the second respondent to achieve his unlawful objectives.
* In view of the above circumstances, the third respondent must be removed from the office of director and the petitioners must be inducted on the board of directors of the Company. All the 4815 . shares purchased from R. Shariff and his associates must be restored back to the petitioners. The Company may be vested with the board of directors consisting of the petitioners and the second respondent to carry on its day-to-day affairs.
Shri Sivasankaran, learned Authorised Representative, in support of his legal submissions placed reliance on the following decisions:
* G. Govindaraj and Anr. v. Venture Graphics Private Limited and Ors. (2005) Vol. 128 CC 632 to show that when none of the pages of the minutes book is initialled, or signed by and the last page of the minutes book is neither dated nor signed by the Chairman of the board meeting or general meeting, without meeting the requirements of Section 193, the presumption under Section 195 with regard to the validity of the minutes could not be drawn. Therefore, the resolutions passed at such meetings are in contravention of the provisions of the Act.
* Micromeritics Engineers Private Limited and Ors. v. S. Munusamy (2003) Vol. 116 CC 465 - (a) to show that once the presumption under Section 193 of the Act is not available, the presumption under Section 195 is also not available to the parties; (b) when primary evidence regarding the posting of letter like the dispatch register and the books of account showing the expenses incurred by the company for posting the letters etc., is not produced, no presumption on the basis of Section 53 (2) of the Act can be made use of; and (c) meetings held without proper notice are not validly held and proceedings of such meetings are illegal.
* Gautam Kapur and Ors. v. Limrose Engineering Works Private Limited and Ors. (2005) Vol.128 CC 237 to show that production of copies of the board meetings is absolutely necessary to establish the holding of the board meetings of the company.
* Navin R. Shah and Ors. v. Simshah Estates and Trading Company Private Limited and Ors. (2005) Vol. 128 CC 55 to show that production of attendance register is necessary to establish the holding of any meeting of a company, in the absence of which the decisions taken at such a meeting will be null and void * Kobian Private Limited v. Kobian India Private Limited and Ors. (2005) Vol. 126 CC 675 to show that in the event of any document on the records of the Registrar- of Companies is under dispute, certified copy of such a disputed document does not carry any evidentiary value.
* Capt. Manmohan Singh Kohli v. Venture India Properties Private Limited and Ors. (2005) Vol 123 CC 198 to show that the requirement of special notice to the director under Section 284(2) and grant of opportunity to be heard under Section 284(3) are necessarily complied with before the removal of any person from the office of director failing which such removal is bad in law.
* Giridhar Gopal Gupta and Ors. v. Aar Gee Board Mills Private Limited and Ors. (2004) 60 CLA 182 to show that removal of any director without confirmity with the procedure laid down in Section 284 is bad in law and that such removal is liable to be set aside.
* Queens Kuries and Loans (P) Limited v. Sheena Jose and Ors. (1993) Vol 76 CC 821 to show that the company was bound to follow the procedure prescribed by law for removal of directors. Under Section 284, special notice has to be given of a resolution to remove a director. The notice must disclose the ground on which the director is proposed to be removed. The disclosure of the ground for removal is a matter of substance and not of form because the directors concerned are entitled to make a representation in writing against their removal at the meeting. The company is bound to send a copy of the representation to every member of the company to whom the notice of the meeting has been sent. It is only after these steps are taken that the resolution can be passed. If special notice of the resolution is not given, as required by law, it would amount to a serious error, depriving the directors of their statutory right to make a representation, without which any resolution removing the directors is invalid.
* S. Varadarajan and Anr. v. Udhayem Leasing and Investments Private Limited (2005) Vol. 125 CC 853 and B.V. Thirumalai and Anr. v. Best Ventures Trading Private Limited and Ors. (2004) 63 CLA 118 to show that special notice shall be required of any resolution to remove any director and that any omission to serve special notice on the directors sought to be removed amounts to denial of their statutory rights of reply and in the absence of any such notice to the directors, any resolution for their removal would be vitiated by such gross omission.
* Mahendra Sahai and Ors. v. Dhruv Theatres and Productions Private Limited and Ors. (2005) Vol 126 CC 164 to show that any removal of a director at a board meeting with out notice must be set aside.
* Jagjit Singh Chawla and Ors. v. Tirath Ram Ahuja Limited and Ors. (2004) Vol. 119 385 to show that directorial complaints in family companies can be agitated in a petition under Section 397 or Section 398.
* M.S. Kumanan and Anr. v. S.S.M. Processing Mills Limited and Ors. (2004) Vol. 122 CC 504 to show that one cannot claim title to the shares on the basis of mere entries in the Annual Returns of the company, especially when the Annual Returns could not conclusively prove title to the shares.
* S. Rehana Rao and Anr. v. Balaji Fabricators Private Limited and Ors. (2004) Vol.122 CC 804 to show that the transfer of shares must be substantiated by production of the minutes of the meeting of the board of directors approving such transfer and that mere pleadings would have no any evidentiary value in this behalf.
* Cardiff Chemicals Limited v. Fortune Bio-tech Limited and Anr. (2005) Vol. 126 CC 275 to show that burden of proving delivery of shares certificates after registering the transfer to the transferee is upon the company.
* Donald Stummer and Ors. v. Maharashtra Power Development Corporation and Ors. (2003) Vol. 117 CC 506 to show that even a single act may be an act of oppression if its effect is of a continuous nature and the member concerned is deprived of his rights and privileges all time to come in future.
* Praful M. Patel v. Wonderweld Electrodes Private Limited (2003) Vol. 115 CC 377 to show that if a company is in the nature of a quasipartnership, removal of a director can be challenged in a proceeding under Section 397 of the Act.
* A.J. Ahmed Jaffer v. Ace Rubber Products Private Limited and Anr. (2004) Vol 121 CC 743 to show that in the case of a family company, applying the principles of partnership the removal of managing director can be challenged in a proceeding under Section 397/398 of the Act.
* Gopal Krishnaji Ketkar v. Mahomed Haji Latif and Ors. 1968 (003) SCR 0862 SC to show that the Court can draw adverse inference against a party withholding evidence in his possession even if the burden of proof does not lie on him.
* Dale and Carrington Investment Private Limited and Anr. v. P.K. Prathapan and Ors. (2004) Vol.122 CC 161 to show that when no meeting of the board of directors has been held the question of validity of such meeting does not arise.
* CDS Financial Services (Mauritius) Limited v. BPL Communications Limited and Ors. (2004) 62 CLA 46 to show that by virtue of Section 9 of the Code of Civil Procedure, the jurisdiction of civil court is not impliedly barred in view of the jurisdiction of the Company Law Board to deal with allegations of oppression and mismanagement of share holders.
* Suryakant Gupta and Ors. v. Rajaram Corm Products (Punjab) Limited and Ors. (2002) Vol.108 CC 133 to show that direction for purchase of shares of the minority by the majority is issued only in case where the company is closely held or where both the groups had participated effectively in the management of the company and one group had by acts of oppression ousted the other group and restoration of the shares holding would only result in further disputes or dead lock in relation to the affairs of the company.
* V.G. Balasundaram and Ors. v. New Theatres Carnatic Talkies Private Limited and Ors. (1993) Vol.77 CC 324 to show that (a) the appointment of the director with a view to gaining majority amounts to oppression; (b) every company shall cause minutes of all proceedings of every general meeting of its board of directors or of every committee of the board to be kept by making within 30 days of the conclusion of every such meeting concerned, entries thereof in books kept for that purpose with their pages consecutively numbered. If the presumption is not available under Section 193, presumption under Section 195 is also not available.
* Uma Pathak and Anr. v. Eurasian Choice International Private Limited and Ors. (2004) Vol.122 CC 922 to show that when the shares are issued with the sole object of creating a new majority and the action of the board of directors is not only in breach of the fiduciary responsibilities but also a grave act of oppression against the existing majority, such acts will be set aside by the Court.
* Cine and Supply Corporation Private Limited., In re Palak Kumar Mondal and Ors. v. Satyabrata Jana and Ors. (2003) Vol. 115 CC 481 to show that when minority share holders complain of lack of notice to extra ordinary general meeting, burden of proof lies on the majority to prove service of notice in the absence of which the minority share holders are entitled to seek relief from oppression under Section 397 of the Act.
* Lt. Cdr D.K. Chatterji v. Rapti Supertronics Private Limited and Anr. (2003) Vol. 114 CC 265 to show that the provisions relating to quorum for meetings are mandatory and consequently the resolutions if any passed at a meeting where there is a quorum would be ipso-facto void.
* Rohit Churamani v. Disha Research and Marketing Services Private Limited (2005) Vol 123 CC 467 to show that any board meeting or general meeting held without quorum is illegal.
3. Shri R.C. Venkatesh Rao, learned Authorised Representative of the respondents opposed the company petition on the following grounds:
* The Company was incorporated with Holla, N. Shariff and Sayed Ilyas as the first directors of the Company. Holla and the first petitioner are not family members and the Company is net a family company, but constituted partly by family members and other members are friends.
* As at 29.09.2004, the second respondent was holding 1279 shares. The shares of outgoing directors namely, R. Shariff and his associates were agreed to be bought by the continuing directors as per the articles of association of the Company and accordingly the transfer of shares in favour of the respondents 2 & 3 and the mode of payment were approved at the board meeting held on 30.09.2004. The second petitioner attended the board meeting as well as the annual general meeting held on 30.09.2004. The attendance sheet maintained at the time of the annual general meeting bears the signature of the second petitioner. The second petitioner has affirmed in his affidavit sworn on 10.04.2006 that the annual general meeting was held on 30.09.2004. Thus, the second respondent acquired 2788 shares and the third respondent 300 shares for Rs. 68 lakhs. The payment for shares has been made by the second respondent for himself and on behalf of the third respondent, as borne out by the bank certificate and the bank statements produced by the respondents, which are duly reflected in the annual return filed with the Registrar of Companies on 22.12.2004. The register of members discloses the transfer of shares in the name of the respondents 2 & 3. The unfinished agenda of the board meeting of 30.09.2004 in respect of the transfer of management and acceptance of resignation of the outgoing directors came to be transacted at the board meeting held on 04.10.2004. During the first phase of the board meeting held on 04.10.2004, the minutes of the board meeting held on 30.09.2004 were approved, the resignation of the outgoing directors was accepted and the transfer of balance shares held by them was apportioned as specified in the annexure thereto, under the Chairmanship of the first petitioner. While the minutes of the first half of the meeting were signed by the first petitioner, the annexure was signed by the outgoing directors and not by the first petitioner. At the continued meeting of the board of directors on 04.10.2004, the transactions relating to administration, authorisation and operation of the bank account were approved. However, while drafting the minutes, the first petitioner clandestinely fabricated the minutes and recorded as if the transfer of 4815 shares was approved in the name of the second petitioner for an amount of Rs. 48.15 lakhs and got the minutes certified by a Practicing Company Secretary. The petitioners, by questionable means, joined hands to grab the control and management of the Company, without making any payment by way of consideration to the transferors for the impugned shares.
* The petitioners should have paid the entire sale consideration of Rs. 48.15 lakhs, by 04.10.2004, failing which the transfer of shares ought to be made as and when payment made and as per the conditions laid down in the articles of association of the Company. Even otherwise, the transfer deeds could not have been lodged and never lodged on the same day namely, 04.10.2004, on account of death of two of the shareholders of the Company and therefore, without validly lodging the duly executed transfer deeds by the transferors, the petitioners could not derive any title to those shares. Mere resolution of the board of directors approving the transfer of share cannot be valid in the eye of law. The claim of the petitioners towards payment of consideration with a premium of Rs. 48.15 lakhs for purchase of the shares is fictitious and false. The sale consideration of Rs. 48.15 lakhs, according to the petitioners, consists of (a) payment made to Unique Enterprises (Rs. 4 lakhs); (b) payment by the first petitioner (Rs. 3 lakhs); (c) unsecured loan withdrawal by R. Shariff (Rs. 18 lakhs) and (d) payments requested to be made by the second respondent (Rs. 23.15 lakhs). However, the payment made to Unique Enterprises is not towards sale consideration of the shares. There is no document to show that the second respondent paid the amount of Rs. 23.15 lakhs to R. Shariff.
* At the board meeting held on 20.12.2004, the discrepancy in regard to the transfer of 4815 shares in the name of the second petitioner, as reflected in the minutes of the board meeting held on 04.10.2004 came to be discussed and thereafter, the annual return, furnishing the factual position in terms of the board meeting held on 30.9.2004, duly signed by the then Chairman was filed on 22.12.2004 with the Registrar of Companies.
* The Company issued notice of the extra-ordinary general meeting held on 28.01.2005, pursuant to the requisitions given by certain shareholders, to all the shareholders including the petitioners through courier consignment. The requisition dated 29.11.2004 convening an extra-ordinary general meeting was sent by A. Mehamood, who is a member holding 30 shares of the Company. N Shariff, still holding 875 shares sent a similar requisition on 01.12.2004. Both the requisitions meet the requirements of Section 169, 173 & 188 of the Act. The Company pursuant to the request of the requisitionists holding 17% of shares, validly convened the extra-ordinary general meeting on 28.01.2005, after due notice sent in due course to the petitioners. All communications to the first petitioner are sent to the branch office located at his residence. Similarly, the correspondence . was made with the second petitioner at his business address. The petitioners did not choose to attend the meeting, wherein they were duly removed from the office of director. Further, convening of the extra-ordinary general meeting was decided at the board meeting held on 20.12.2004, to which the petitioners were parties and therefore they were quite aware of the meeting of 28.01.2005. The petitioners attended the board meeting, but did not sign the attendance sheet. However, their presence is borne out by the return journey air tickets, copies of which have been produced before this Bench. The petitioners were removed at the extra-ordinary general meeting after due compliance with the statutory requirements of Section 284 of the Act and the third respondent was appointed as a director of the Company, upon which necessary Form No. 32 was filed with the Registrar of Companies. Consequent to cessation of office as director by the petitioners with effect from 28.01.2005, no notice was sent to them for the subsequent board meetings. The appointment of the third respondent, who happens to be the wife of the third respondent, is not barred by law.
* After removal of the petitioners from directorship, they made consistent efforts for stalling the operation of the bank account maintained by the Company, upon failure of which, the petitioners moved the Civil Court to restrain the respondents 2 & 3 from operating the bank account. When the petitioner failed to obtain any interim order from the Civil Court, they have invoked the jurisdiction of the CLB with ulterior motive to keep away the respondents from the day-to-day management of the Company.
* No blank signed cheque leaves were ever left with the second respondent. Post dated cheques and cheques favouring statutory authorities were sent to the petitioners, in advance with amount alone to be filled, for smooth running and operation of the Company.
* The Company being an ISO 9000 Company has employed more than 200 employees and is contributing to the national exchequer by way of VAT, Income Tax and Central Excise. The Company is enjoying credit facilities from its banker to the tune of Rs. 5 crores. Hence, the question of winding up does not arise.
* The petitioners owe Rs. 3 lakhs to the Company, but are neglecting to settle the dues. In the words of the petitioners, there were no disputes till October, 2004, but however they contend that the respondents have fabricated the Company's records. The petitioners are taking contradictory stands at different point of time. The petitioners complained before the banker and the Registrar of Companies on the differences between the directors and acted in a manner prejudicial to the interests of the Company. The petitioners filed a civil suit against the respondents but failed to achieve their illegal objectives. The annual return made upto 30.09.2004 filed before the CLB, but not before the Registrar of Companies does not bear the signature of the petitioners. This return not containing the correct particulars in regard to the shareholding of the respondents 2 & 3 is fabricated. Thus, the petitioners have not approached the CLB with clean hands, thereby they are not entitled to any equitable reliefs. The petitioners have not made out any case either under Section 397 or Section 398 and therefore, the company petition is liable to be dismissed.
Shri R.C. Venkatesh Rao, learned Authorised Representative, relied on the following decisions:
* Shanti Prasad Jain v. Kalinga Tubes Ltd. to show that there must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.
* Surinder Singh Bindra v. Hindustan Fasteners Private Limited (1990) 69 Com 718, 726 (Del) to show that Section 398 comes into place when there is actual mismanagement or apprehension of mismanagement of the affairs of the company.
* Clive Mills Co. Ltd., Re (1964) 34 Com Cases 731 (Cal) to show that general and vague allegations of misappropriation of funds, mismanagement or other improper conduct in the management of the company's affairs do not justify the Court in making any such order on such allegations.
* Thakur Paper Mills Ltd. In Re 1975 Tax LR 1656 (Pat) to show that any changes in the control and management of the company and the appointment of new directors as a result thereof cannot be questioned under Section 398.
4. I have considered the pleadings and arguments of the learned Authorized Representatives. The issues, which arise for consideration are whether the acts complained of in the present company petition warrant any interference of this Bench and if so, whether the petitioners are entitled for the reliefs claimed therein. The main grievances of the petitioners are in relation to (a) transfer of the impugned shares in favour of the respondents 2 & 3; (b) removal of the petitioners from the office of director and (c) appointment of the third respondent as a director of the Company. According to the respondents, the outgoing directors namely R. Shariff, N. Shariff and Syed Ilayas expressed their desire at the board meeting held on 30.09.2004 to offer their shares, namely 4815 shares in favour of the second respondent being a relative, as per Clause 6(E)(i) of the articles of association of the Company and the second respondent accepted to buy 3088 shares out of the 4815 shares offered by the outgoing directors and their associates. Accordingly, the board of directors approved the transfer of 2788 shares in the name of the second respondent and 300 shares in favour of the third respondent, in accordance with the Article 6(1)(iv) of articles of association of the Company. It is vehemently contended that the second petitioner never attended the board meeting purportedly held on 30.09.2004. The respondents, to prove their claim, has not produced any evidence save the minutes book of the board of directors containing the proceedings of the minutes dated 30.09.2004, genuineness of which is under serious disputes. By virtue of Section 286 of the Act, notice of every meeting of the board of directors of a company shall be given in writing to every director in the prescribed manner failing which every officer of the company shall be punishable as specified therein. The requirements of Section 286 being mandatory, notice to all the directors of meeting is essential for the validity of any resolution passed at the board meeting, Where no notice is given to any one of the directors of the Company, the resolution passed at the meeting of the board of directors becomes invalid, in support of which beneficial reference is invited to a decision in Parmeshwari Prasad Gupta v. Union of India . There is no material on record to establish that the respondents have complied with the requirements of Section 286 before convening and holding the purported board meeting, approving the transfer of shares in favour of the respondents 2&3. It is observed that the regulations contained in Table 'A' of the first schedule of the Act shall apply to the Company and regulation 71 stipulates that every director present at any meeting of the board or of a committee thereof shall sign his name in a book to be kept for that purpose. This requirement is conspicuously absent in the instant case and the respondents failed to establish that the second petitioner attended the board meeting purportedly held on 30.09.2004 in which event any decision at such meeting will be null and void as held in Navin R. Shah and Ors. v. Simshah Estates and Trading Company Private Limited and Ors. (2005) Vol. 128 CC 55. (supra).
According to the petitioners, they had acquired 4815 shares from the outgoing directors for a consideration of Rs. 48.15 lakhs which shall consist of (a) payment made to Unique Enterprises (Rs. 4,00,000/-) (b) payment by the first petitioner (Rs. 3,00,000/-) (c) unsecured loan withdrawal by R. Shariff (Rs. 18,00,000/-) and (d) payment required to be made by the second respondent (Rs. 23.15 lakhs). The transfer of 4815 shares in favour of the second petitioner was purportedly approved at the board meeting held on 04.10.2004. The relevant minutes (pages 18-21 of the minutes book of the board of directors) would show that R. Shariff had given all the share certificates alongwith the transfer deeds, duly stamped in favour of the second petitioner, which were placed before the board of directors. The second petitioner acquired 4815 shares from R. Shariff and his associates for a premium as shown in the transfer deeds. At the same time the minutes of the board meeting held on 04.10.2004 (Pages 14-16 of the minutes book) would reveal that R. Shariff and his associates sold shares which are being acquired and allotted to the members, as per the statement, forming part of the minutes of the board meeting, according to which the first petitioner was to acquire 861 shares and the second petitioner to acquire 866 shares. Both the minutes under serious challenge are contradictory to each other. While the petitioners claim that they have acquired 4815 shares for Rs. 48.15 lakhs on the strength of the second phase of the minutes dated 04.10.2004, the respondents 2 & 3 reportedly acquired 3088 shares for Rs. 68 lakhs even son 30.09.2004. The petitioners as well as the respondents are relying upon the bank statements to prove the payments made towards purchase consideration of the shares. However, the transferors namely R. Shariff and his associates are not parties to the present proceedings to vouch or deny the sale of shares in favour of either petitioners or the respondents 2 & 3, as the case may be in terms of the resolutions reportedly passed at the board meeting held on 30.09.2004 or 04.10.2004. The contesting parties have not even chosen to obtain an affidavit sworn to by the concerned transferors in support of their claim of purchase of shares and payment of consideration in favour of the transferors. The disputes involve substantial rights of the parties and where the allegations are forgery and fabrication of records, which could only be resolved by oral testimony tested by cross examination of witnesses, cannot be resolved on the strength of the averments made in the affidavits filed by the parties, defeating the purpose and object of the summary procedure prescribed by Section 397/398. It is of course not mandatory that whenever allegations of fabrication of records are made, the parties should be relegated to a civil suit. However, the complicated questions of facts and serious controversies involved in the present petition necessitate a regular investigation and therefore, the contentious issues regarding the genuineness of purchase of shares by the petitioners or the respondents 2 & 3 cannot be decided in a summary jurisdiction by this Board at this stage, but such controversies can be tested and adjudicated upon only by a civil court whose jurisdiction is not barred in the light of the decision in CDS Financial Services (Mauritius) Limited v. BPL Communications Limited and Ors. (supra). In this background, none of the parties can claim title to the shares on the basis of mere entries in the annual returns of the Company, since the annual returns could not conclusively prove title to the shares, as held in M.S. Kumanan and Anr. v. S.S.M. Processing Mills Limited and Ors. (supra). In view of the complexity of the issues and in the absence of transferors being parties to the proceedings, I am reluctant to go into the matter and the parties are at liberty to agitate their rights in respect of 4815 shares reportedly purchased from R. Shariff and his associates, in a competent civil court.
According to the respondents, two of the shareholders lodged the requisitions with the Company to convene an extra ordinary general meting for the purpose of (a) removal of petitioners from the office of director; and (b) for appointment of the third respondent as a director of the Company. The respondents have produced the courier consignment notes to establish service of the requisitions sent by the requisitionists and notice of the annual general meeting on the petitioners. The courier consignment notes indicate that copies the requisition sent in respect of the first petitioner and notice of the extra ordinary general meeting convened on 28.01.2005 were despatched to Finecore Cables Private Limited, Bangalore-560 002. Similarly copies the requisition in respect of the second petitioner and notice of extra ordinary general meeting were despatched to M/s Nooria Enterprises, Bombay. By virtue of Section 53, a company may serve a document on any member: (a) personally or (b) by post at his address in India as recorded in the company's register or at the address in India given by the member for services. A letter sent by post should be properly addressed and stamped. The address should be the registered address or the address supplied by the member for such purpose. It is not the case of the respondents that they have despatched copies of the requisition of the requisitionists and notice of extra ordinary general meeting to the registered address of the petitioners. There is no material to show that the petitioners have supplied any different address for service of any document on them. Moreover, the courier consignment notes, in the event of serious disputes between the parties, cannot amount to conclusive proof of services of notice on the concerned addressees, especially when dispatch of notice by courier service is not in consonance with Section 53(1)(a) of the Act. The courier consignment notes, in the instant case will only show that certain documents have been despatched to Finecore Cables Private Ltd., Bangalore in case of the first petitioner and Nooria Enterprises, Bombay in case of the second petitioner. It is, therefore, beyond doubt that mere production of the courier consignment notes cannot amount to conclusive proof of service of copies the requisitions and notice of the meeting on the petitioners, satisfying the requirements of Section 172. Section provides that notice of every meeting shall be given, among others, to every member of the company whose name appears on its register of members. The provisions of Section 172 are mandatory and must strictly be complied with, non-compliance of which invalidates the resolutions passed at such meeting. Any meeting held without proper notice is not validly held and proceedings of such a meeting is illegal, as held in Micromeritics Engineers Private Limited and Ors. v. S. Munuswamy (supra). The respondents failed to prove service of notice of the extraordinary general meeting on the petitioners and therefore, they are entitled to seek relief from oppression, as held in Cine and Supply Corporation Private Limited., In re Palak Kumar Mondal and Ors. v. Satyagrata Jana and Ors. (supra). Mere knowledge of the meeting would not tantamount to service of notice in terms of Section 172 of the Act. It is, therefore, immaterial whether the convening of the annual general meting was approved in the presence of the petitioners or not at the board meeting purportedly held on 20.12.2004, which is supported only the disputed minutes and not by any other primary evidence. It is rather unsafe to place any reliance on mere courier consignment notes without any collaborative evidence such as despatch register and books of account, showing the expenses incurred in connection with the sending of notices to the shareholders including the petitioners, in which case, no presumption on the basis of Section 53(2) can be made use of, as held in Micromeritics Engineers Private Limited and Ors. v. S. Munuswamy (supra). By virtue of Section 284 any director, including a permanent director may be removed before expiry of his tenure of his office by passing an ordinary resolution at a general meting. However, the director concerned and the shareholders should be given sufficient opportunity to consider the matter before the resolution is moved. For moving such resolution to remove a director or to appoint somebody in the place of the removed director a special notice especially given. The company on receipt of such a special notice from any of its members shall send a copy to the director concerned to enable him to make his representation in this behalf. The requirements of Section 284 are mandatory as held in (a) Capt. Manmohan Singh Kohli v. Venture India Properties Private Limited and Ors.; (b) Gridhar Gopal Gupta and Ors. v. Aar Gee Board Mills Private Limited and Ors.; (c) S. Varadarajan and Anr. v. Udhayem Leasing and Investments Private Limited; (d) B.V. Thimmalai and Anr. v. Best Ventures Trading Private Limited and Ors.; (e) Mahendra Sahai and Ors. v. Dhruv Theatres and Productions Private Limited and Ors.; and (f) Queenns Kuries and Loans (P) Limited v. Sheena Jose and Ors. (supra). In these circumstances, it cannot either be said that the petitioners have been validly removed from the office of director or the third respondent has been validly appointed as a director of the Company. The Company being a closely held private limited company is in the nature of a quasipartnership, in which case, directorial complaints are amenable to the jurisdiction of Section 397, as held in Praful M. Patel v. Wonderweld Electrodes Private Limited (supra). When the appointment of the third respondent as a director in the present case is with a view to assume exclusive control of the Company, it can be agitated under Section 397 and therefore the decision in Thakur Paper Mills Limited, In Re, (supra) will be of little assistance to the respondents. The illegal termination of directorship of the petitioners coupled with the irregular appointment of the third respondent as a director, with the sole object of usurping full control of the Company in association with her husband, being the second respondent would result in bringing material change in management under Section 398 and shall appropriately be remedied.
Form No. 32 on the records of the Registrar of Companies, disclosing the removal of the petitioners from directorship and the appointment of the third respondent as a director, which are found to be irregular does not carry any evidentiary value, as held in Kobian Private Limited v. Kobian India Private Limited and Ors. (supra). These facts of the present case would demonstrate that there is lack of probity in the conduct of the affairs of the Company by the respondents that the petitioners can no longer have confidence in the respondents, warranty winding up of the Company on just and equitable grounds which would however unfairly prejudice the Company and its members. Nevertheless, in view of the differences and loss of trust between the parties, there is little scope for their co-existence in pursuing the Company's affairs in future. While the petitioners are desirous of carrying on the business together with the second respondent, the latter is not ready and willing to go along with the petitioners and the attempts made by the Bench in this behalf failed to yield any positive result. However, their togetherness would only result in further disputes or dead lock in the affairs of the Company. The first petitioner is holding 16.45% and the second petitioner has 5.06%, while the second respondent holds 16.08% of shares of the Company. In view of this, it is not equitable to direct either the petitioners group or the respondents group to go out of the Company. Both the groups have been in the management of the Company at the relevant point of time and they would be aware of real worth of the Company. I am, therefore, of the considered view that the more equitable relief would be that the petitioners group and the respondents group shall quote their price per share and the group that quotes the higher, price should purchase the shares of the other group at that price. In view of the foregoing conclusions and in exercise of powers of the Company Law Board under Section 402 of the Act, the following order is passed:
(i) The removal of the petitioners from the office of director of the Company is declared as null and void.
(ii) The appointment of the third respondent as a director of the Company is set-aside.
(iii) The petitioners and the respondents 2 and 3 are at liberty to realise the purchase consideration reportedly paid in respect of the impugned shares from R. Shariff and his associates, in any lawful manner as they deem fit.
(iv) The Registrar of Companies will ignore the statutory returns which are contrary to these directions filed by the parties before him in relation to the transfer of shares, the appointment and removal of the directors.
(v) The petitioners group and the respondents group will appear before this Bench on 30.11.2006 at 2.30 P.M and submit their offer in closed covers indicating the price per share that they are willing to offer. The group which quotes the higher price should purchase the shares of the other group at that price and the consideration for the same shall be made within two months. If for any reason, the group quoting the higher price fails to purchase the shares of the other group within two months, the other group will have the right to purchase the shares of the defaulting group within the next two months at the price quoted by the other group.
With the above directions, the company petition is disposed of, reserving the right to pass consequential order on 30.11.2006, when both groups will present their offer quoting their price per share in closed covers. No order as to costs.