Company Law Board
Shri Navin Ramji Shah, Smt. Chandri ... vs Simplex Engineering And Foundry Works ... on 13 September, 2006
Equivalent citations: [2007]136COMPCAS770(CLB), [2007]75SCL336(CLB)
ORDER
S. Balasubramanian, Chairman
1. The above petition was disposed of by an order dated 21.10.2004 which was taken on an appeal before Bombay High Court, which, after observing that this Board had not analyzed the evidence to come to a conclusion there is oppression to exercise the jurisdiction under Sections 397/398, remanded the case back to this board for re-hearing and disposal. Accordingly the petition was reheard.
2. The petitioners who collectively held 12.99% of the paid up capital of M/S Simplex Engineering and Foundry Works Co. Ltd. (the company) have filed this petition alleging that by allotment of further shares in exclusion of the petitioners, their holding has been reduced to 10.05% and consequently they have sought for a declaration that the allotment of shares is bad in law and should be set aside or in the alternative the allottees of the shares should directed to pay the fair value of the shares determined by an independent valuer. In addition, they have also alleged that the 1st petitioner has been illegally removed from the board and as such should be restored as a director.
3. Shri Choudhary, appearing for the petitioner submitted: The company took over the business of a partnership firm in which the petitioner and the family members of the petitioner and that of the 2nd respondent were partners and on taking over of the business, shares were allotted in the same proportion as was in the partnership. The company is a family company and the petitioners' group and respondents' group are closely related. The petitioner being a qualified technocrat was one of whole time directors right from its incorporation. Even though the company's growth is largely attributable to the 1st petitioner, out of jealousy, the respondents started creating hurdles in the way of working of the petitioner. Therefore, by a letter dated 10th June, 1988 addressed to the 2nd respondent, being his uncle, the petitioner requested the former, to settle the accounts of the petitioner and also release him of his personal guarantees. However, notwithstanding the fact this was a personal letter addressed to the 2nd respondent, he placed the letter before the board on 27.7.1998 and informed the board that the 1st petitioner had chosen to resign from the board and accordingly his resignation was accepted w.e.f. 1.9.1998. Since the petitioner was not present in that meeting, the 2nd and 3rd respondents taking advantage of his absence, in effect, had removed the petitioner as director by misusing a personal letter. It is to be noted that at that time there were disputes between the family members and with a view to settle personal scores, the letter of the 1st petitioner addressed to the 2nd respondent had been misused to remove the petitioner from the board. The intention of the petitioner not to resign from the board is apparent from the fact that even after his letter dated 10.6.1998, he attended a board meeting on 26.9.1998 wherein his so called resignation letter was not discussed. Only from the letter of the 2nd respondent dated 29.9.1998 informing the petitioner that his resignation has been accepted effective from 1.9.1998, the petitioner came to know that his personal letter has been misused by the 2nd respondent. The very fact that the letter was not addressed to the company or the board of directors and that no date for his resignation to become effective had been indicated, it is quite clear that it was not a resignation letter. The fact that the respondents had decided to oust the petitioner from the management is evident that the form No. 32 wherein it is shown that the 1st petitioner has resigned from 1.9.1998 had been signed on 18.8.1998 itself. A letter of resignation addressed by a director to a third party would not be a valid resignation as decided in ROC v. Orissa Paper Products Ltd. 66 CC 460. Further this Board has held in Naresh Trehan v. Hymatic Agro Equipments Pvt. Ltd. 1997 CC 561 that "Although the shareholders have full right to remove a director, yet, such a right is not unrestricted in a family company and an aggrieved shareholder can always complain of a oppression even if the removal is in accordance with law. A family company is one in which there is a special relationship among the shareholders and the normal law relating to other companies cannot be straightway applied". Even assuming that the letter was really a letter of resignation, the same was subject to the settlement of accounts of the petitioner which was never done and therefore his alleged resignation could not have come into effect. The alleged removal from directorship was immediately protested and elders of the family have all along been trying to resolve the dispute domestically and that is why the petitioner did not move the petition earlier.
4. The learned Counsel further submitted: After, the alleged removal, the company stopped sending annual reports to the 1st petitioner in spite of repeated reminders. Only on 5.10.2001, on his personal visit to the office of the company, the petitioner could collect the copies of the balance sheets for the years 31st March, 2000 and 31st March, 2001. The petitioners were not even sent notices for AGMs notwithstanding the fact they have invested substantial funds in the company and the 1st petitioner actively involved himself in the company as a whole time director. After removing the petitioner from the board, the company had issued new "A" equity shares during the year 1999-2000 and 2000-2001 which fact the petitioners came to know only after perusal of the annual report. Notwithstanding the fact that the company is a family company, yet, no shares were offered to the petitioners resulting in holding of the petitioners coming down from 12.91% shares to 10.5%. Further, as per the net worth of the company as on 31.3.2000, the fair value of the share was Rs. 300/-each and the fair value as on 31.3.2001 was Rs. 285/- per share but all the shares were issued at par. The total number of shares issued was 5,98,676 which were all allotted to the respondents' group but no shares were offered to the petitioners with a view to reduce their holding in the company. At the time when the shares were issued in the year 1999 and 2001, the company was a deemed public company and therefore in terms of Section 81(1) of the Act, the existing shareholders should have been offered shares on a right basis which the company did not do V. Radhakrishnan v. P.R. Ramakrishna1998 CC 694, it has been held that the provisions of Section 81(1) of the Act are applicable to a deemed public company and in case right offers had not been made to the existing shareholders, the allotment of shares would be void. In Shoe Specialities Pvt. Ltd. 82 CC 836, the Madras High Court has held that the power to issue further shares should be exercised in the interest of the company and not for the benefit of any group. Similar decision has been given by this Board in Deepak D. Mehta v. Anupar Chemicals (I) Pvt.Ltd. 1999 CC 575. The company has not established the need for funds for allotting further shares. A perusal of the balance sheets for the years 1999-2000, 2000-2001, 2001-2002 would reveal that outstandings to be collected from debtors amounted to Rs. 18 crores, Rs. 15 crores and Rs. 1l crores respectively including outstandings from the entities belonging to the respondents of Rs. 1l crores, Rs. 9 crores and Rs. 6 crores respectively. Most of the outstandings were loans given by the company. As against this huge outstandings, the total amount raised by way of further issue of shares was hardly about Rs. 60 lacs. If the company had collected even a small percentage of outstandings owed by the entities belonging to the respondents, there would have been no need to issue further shares which was done only to affect the interest of the petitioners. Further, by issuing the additional shares at par, while the fair value of the shares was much higher, the respondents have caused a loss of about Rs. 17 crores to the company. With a view to further cause loss to the company and to the detriment to the petitioners, the company had issued a notice on 20.11.2002 calling for an EOGM on 6.12.2002 for increasing the authorized capital of the company from Rs. 3.5 crores to Rs. 5 crores.
5. The learned Counsel appearing for the respondents submitted: The present petition suffers from latches, acquiescence and estoppel. Even though the Provisions of Limitation Act are not strictly applicable to this Board, yet, inordinate delay on the part of the petitioner to move the petition cannot be condoned. The main contention of the petitioner is that his letter dated 10.6.1998 was not a letter of resignation and therefore should not have been treated as such and accepted by the board. Whether the said letter was a resignation letter or not cannot be determined by this Board and the petitioner has to agitate the same before a civil court. The fact that his resignation had been accepted was conveyed to the petitioner by a letter dated 27.9.1998 and effective from the date of resignation even his remuneration was stopped but he never agitated the issue till filing of this petition. As per his request in the said letter, his accounts were settled and the personal guarantees given by him to the bank had also been released. In other words, even the conditions for acceptance had been fulfilled. The excuse given by the petitioner for the delay that he was attempting to get the matter settled amicably can never be an excuse or justification for filing this petition nearly after 5 years. In A.P. Jain v. Faridabad Metal Udyog Ltd. 2005 83 DRJ 389, the Delhi High Court has held that even though the provisions Limitation Act are not applicable to the proceedings before CLB, yet, if a petitioner approaches the CLB after a long delay, then, the CLB can refuse to entertain such a petition. Therefore, this petition should be dismissed at the threshold.
6. The learned Counsel further submitted: It is a settled law that to invoke the provisions of Section 397, the petitioner has to establish that he has been subjected to oppression in his capacity as a shareholder. In the present case, the petitioner has invoked the provisions of Section 397 in regard to his removal as a director which cannot be entertained. In Needle Industries case , in paragraph 52 of the judgment, the Supreme Court has held "A person complaining of oppression must show that he has been constrained to submit to a conduct which lacks in probity, conduct which is unfair to him and which causes prejudice to him in the exercise of his legal and proprietary right as a shareholder". In Hanuman Prasad Bagri v. Bagress Cerals Private Ltd. , the Supreme Court has held that the termination of the directorship would not entitle a person to invoke the provisions of Sections 397/398 of the Act and the remedy available is to approach a civil court. Likewise, in Parmanand Choudhary v. Smt Shukla Devi Mishra67 CC 45 MP, it has been held when a director of a private company voluntarily hands over the management and absents himself from the board meetings, it could not be said that he is a victim of oppression. Since in the present case, the petitioner had voluntarily resigned from the directorship and has never agitated regarding the same for nearly 5 years, he cannot file this petition alleging oppression. Even otherwise, a careful reading of the letter of the petitioner dated 10.6.1998 would very clearly indicate that it was nothing but a letter of resignation. When the petitioner had said that the time had come to say good bye to the business association and partnership and therefore his accounts should be settled and his personal guarantees released, the same would amount to nothing but resignation. In considering a document, substance is more important than the form. This letter was not addressed to a third party as claimed by the petitioner but was addressed to the Chairman of the company and the same was considered in a board meeting and the board took the collective decision of accepting the resignation. Therefore, the petitioner cannot impugn his cessation as a director brought out by his own conduct.
7. The learned Counsel further submitted that to allege oppression and mismanagement, the same should be specifically pleaded and proved especially in relation to allegations of malafide Sangram sinh P. Gaekwad v. Shanta Devi P. Gaekwad . In the same case, it has also been held that an isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of the majority shareholders is thus necessarily to be proved. Similar decision is found in Santi Prasad Jain v. Kalinga Tubes Ltd. . Further, past and concluded transactions which are no longer continuing cannot be adjudicated in a proceeding under Sections 397/398. (A few more cases were cited in this regard). The petitioner has not suffered any injury in as much as no further dividend has been declared nor any bonus or right issue has been made thereafter. To seek a remedy under Section 397, it should be established that the allegations are such that company is liable to be wound up just and equitable grounds. The petitioner has not so established.
8. Learned Counsel further submitted that in so far as allotment of shares are concerned, it is true that in 1999, the company was a deemed public company and therefore in terms of Section 81(1) shares were offered to all the existing members including the petitioners but they did not subscribe to the shares because of an oral family arrangement. In so far as the allotment made in 2001 is concerned, at that time the company had converted itself into a private limited company and therefore the provisions of Section 81(1) were not applicable and no shares were offered to the petitioner. The non allotment of shares to the petitioners has not in any way affected their position in as much as they were in minority before the allotment and continued to be so even after the allotment. Therefore the question of oppression does not arise. The same is the position with the apprehension of the petitioners that by increasing the authorised capital from Rs. 3.5 crores to Rs. 5 crores, the shareholding of the petitioners would be further reduced. As and when the company needs capital, as long as the same is raised in accordance with law, no shareholder can complain that that the allotment would result in oppression. The claim of the petitioners that instead of raising fresh capital, the company should have realized all the debts due to it has no basis. The debts shown in the books of accounts are not money lent but trade advances made by the respondent company including certain inter corporate loans and the company was not in a position to call back these advances as this would have affected its working and future prospectus and therefore the board decided to raise capital by way of further issue of shares. In theNeedles Industriescase, the Supreme Court has held that it is not always necessary that share capital can be increased only when the company needed funds but could for other purposes also like compliance with statutory rules etc. Therefore, there is no substance in the allegations in regard to allotment of further shares. In view of the fact that the petitioners have not established any act of oppression or mismanagement, this petition should be dismissed.
9. I have considered the pleadings, arguments and the written submissions. In so far as limitation is concerned, as submitted by the learned Counsel for the respondents that the provisions of Limitation Act are not applicable to a proceeding before this Board in terms of Sections 397/398 of the Act. Further, when this Board exercises equitable jurisdiction technicalities like delay etc. are also not given much weightage, especially in cases of family companies wherein the family members always attempt at an amicable settlement before bringing the matter before the court. In the present case, the petitioner appears to have attempted at an amicable solution but seems to have failed. Therefore, I do not consider that this petition should be dismissed on account of delay or latches. The respondents have contended, relying on Needle Industries, Bagress Cerealscases to contend that directorial complaints cannot be entertained in a petition under Sections 397/398. No doubt, in a number of cases, this Board has also held that directorial complaints cannot be agitated under Sections 397/398, but it has also held that, in family companies and companies in the nature of quasi partners, directorial complaints can be entertained. In the present case, the admitted position is that the company took over the business of partnership firms in which the petitioner was a partner and thereafter, he continued to be a whole time director of the company. Thus, the petitioner has a vested right to continue as a director. The learned Counsel for the respondent cited the decision in Parmanand Choudhary case to contend that once a person hands over the management voluntarily, he cannot impugn the same. In the present case, it is an issue to be determined whether the petitioner had voluntarily resigned from the Board. Therefore, the grievance of the petitioner in relation to the acceptance of his resignation deserves to be examined.
10. Whether the letter of the petitioner dated 10.6.1998 could have been treated as a letter of resignation has to be examined with reference to the contents of the said letter. The letter reads "10th June, 1998- Respected Shri Hiralalkaka, I sincerely thank you for your kind co-operation, courtesy and guidance extended to me during my last 30 years of association with you all. I enjoyed and shared the good as well as bad time, happiness and sorrow together. I must appreciate that under your able leadership and vision alone the companies have reached to respectable level where it has earned international fame and position in steel industries...The operations of the companies have become very smooth, expansion is also in full swing, the liabilities are over It's a pleasant scenario where one feels proud and satisfied... Once the preson the person reaches to satisfaction then it is time that he should diversify his activities. Under the circumstances the time has come for me to say goodbye to our business association and partnership. Though it is a hard decision for me to take but I have to take this decision due to my personal reasons. ...request you to please settle my accounts and release my personal guaranties given to Bankers and Financial institution at the earliest. ...During these 30 years of association I might have hurt your pride, respect and feelings directly or indirectly may now be forgiven... I once again thank you for your love and affection rendered to me and confident that same will be rendered to me even we are separated in our business association. I will be always available for any service required from my side. It will be attended with pleasure and without obligation. ...I will be highly obliged if my & family's accounts are settled and personal guaranties are released immediately. Henceforth I shall not be responsible for any liabilities...With regards, Yours (Navin Shah)... CC:Shri Anvind Shah... Calcutta... Shri M. R. Shah.. Raipur ".
11. A perusal of the above letter would indicate that there is no mention about the name of the company. The petitioner had talked about 30 years of association while the company was incorporated only in 1980. There is no mention about directorship nor the letter has been addressed either to the company or to the board of directors. Whether this letter is specific relating to the association of the petitioner with the company or association with all other companies is also in doubt. Any letter of resignation has to be clear, unambiguous, and specific and addressed to the proper authority. There is not even a mention of "resignation". Therefore, by treating this letter as the letter of resignation and ousting the petitioner who was a partner in the earlier firm the business of which the company had taken over, and continued as a whole time director of the company, the respondents have acted highly oppressive to the petitioner.
12. In so far as allotment of further shares is concerned, the allegations of the petitioners are manifold: that the company was not in need of funds; that it could have realized the loans given to the entities belonging to the respondents; that the shares were allotted at par while the fair value was very high only with the view to enrich the respondents; that no offers had been made to the petitioners with a view to reduce their holding etc. The respondents have contended that the status of the petitioners has not been any way changed on account of the allotment of shares and it is also contented that in respect of the first allotment, the petitioners were offered rights shares. In the matter of allotment of shares in a family company, it is not always necessary that the allotment should be impugned only if the status of a shareholder from majority into minority is affected. In family companies, any reduction in the percentage shareholding irrespective of the quantum of percentage, the affected party can always allege oppression as his position viz-a-viz. other family members gets altered due to non allotment of shares. It is seen that all the 598676 shares proposed to be allotted on the two occasions had been allotted only to the members belonging to the respondents' group and thus they have consolidated their position in the company. There is no evidence that for the first allotment, shares were offered to the petitioner and the respondents have admitted that in respect of the second allotment, no offer was made to the petitioners. Thus, the petitioners are justified in claiming that by the said allotments, not only the respondents have enriched themselves but also reduced the percentage holding of the petitioners.
13. Thus the petitioners have established the acts of oppression. In terms of Section 397, once acts of oppression are established, winding up of the company on just and equitable ground would automatically follow and this Board has to only consider whether the winding up of the company would be in the interest of the shareholders. Considering the fact that the petitioners' holding in the company is only around 10% and that the company is engaged in a profitable business, winding up of the company would be against the interest of the shareholders as well as the company. Therefore, since in terms of Section 397 the acts complained of should be put an end to, I could direct the company to take back the 1st petitioner as a director and also direct the allottes of the shares to transfer such number of shares to the petitioners which would bring their share holding to the original percentage. However, I do not propose to do so. It is the understanding of the respondents that the desire of the petitioner in saying "good bye" amounted to resignation. He had actually desired to say "good bye" to the business association and partnership. It would mean that he did not desire to have any association with the respondents. This being the case, his business association can be terminated by purchasing his shares in the company so that the respondents would have truly acted not only in spirit but also in terms of that letter. Even otherwise, since the relationship between the petitioners and the respondents has soured, in the interests of all concerned, the petitioners, being in minority, their shares could be purchased either by the company or the respondents as the case may be at the option of the respondents. This would not only put an end to the disputes but also would be in the long term interests of all concerned. By another order of even date, in respect of another company in which the same shareholders are parties, I have given the option to the respondents, who are in minority, to go out of the company. Therefore, in terms of Section 402, I consider it appropriate that the final goodbye shoul be by way of exist of the petitioners as members of the company by directing the respondents/the company to purchase the shares held by the petitioners on a fair value to be determined by an independent valuer. such fair value will also take care of the allegation of the petitioners that the respondents have issued shares to themselves at par value when the fair value was much higher. Accordingly, I order so. The parties will appear before me on 17th October 2006 at 2.30.p.m. to suggest a mutually acceptable valuer to determine the fair value. The valuation of the shares shall be on the basis of the balance sheet as on 31st march 2003, being the proximate to the date of the petition.