Company Law Board
Shri Dhananjay Pande vs Dr. Bais Surgical And Medical Institute ... on 2 December, 2004
Equivalent citations: [2005]125COMPCAS626(CLB), [2005]60SCL348(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioner claiming to hold 49% shares in M/S Dr. Bais Surgical & Medical Institute Private Ltd. (the company) has filed this petition alleging that he has been illegally removed as the Managing Director/director of the company and that respondent 3 and 4 are guilty of siphoning of the funds of the company for their personal use and as such has sought for various reliefs inter alia including for a declaration that his removal as the Managing Director/director was illegal and that there should be an independent audit of the accounts of the company.
2. The facts of the case are that the company was incorporated sometime in November 1994, with the 3rd and 4th respondents as subscribers to the Memorandum with one share of Rs. 10/- each. They were the first directors of the company. The business of the company was to run a hospital in the name of Dr. Bais Hospital which was later on named as Ekvira Heart Institute. The building owned by the 2nd respondent has been given on lease to the hospital at Rs. l000 per month for a period of 9 years effective from 1st April, 1998. The company had nil turnover up to March, 1998 but had a liability of about Rs. 4.3 crores at that time.
3. The case of the petitioner in brief is; In view of the grave financial difficulties faced by the company, the respondents, more particularly, the second respondent Dr Bais, approached the petitioner who was in the business of dealing in hospital equipments through his firm-Ekvira Surgical Company, for joining the company with financial participation. According to him, it was also agreed that he would have equal equity participation with the respondents and accordingly he had invested a sum of Rs. 148 lacs in share capital of the company and in addition he had also contributed Rs. 41, lacs as unsecured loans. He was appointed as the Managing Director for a period of 5 years from 1.1.1998. The authorized share capital was increased from Rs. 1 crores to Rs. 3 crores and he was allotted shares worth Rs. 148 lacs in a Board Meeting held on 15.7.1999 but the company had not delivered the share scripts. With this allotment, presently he holds 49%, shares in the company while the 2nd respondent group holds 51%. While things were going on smoothly, according to the petitioner he noticed some heavy withdrawals of cash ranging, from Rs. 50000 to Rs. 60,0007- by the 3rd and 4th respondents for their personal use, every month. Therefore, by a letter dated 16th May, 2000, he instructed the Accountant not to allow any expenditure which was not related, to the functioning of the hospital. Angered with this instruction, the 3rd respondent, by a letter dated 19.5.2000, terminated the services of one Wg. Cdr. S.K. Kelker (Retd.) who had close associations with the petitioner. When the petitioner confronted the 4th respondent to ascertain the reasons for termination of the services of the said officer (Sic) a letter dated 20.5.2000 removing the petitioner as the (Sic) Director. Thereafter, with the intervention of well wisher (Sic) conciliatory meeting took place between the petitioner and the 2nd and 3rd respondents on 27th to 29th May, 2000. A copy of the minutes of the Conciliation meeting signed by all the parties is at Annexure -6, according to which the investment by the petitioner in the company was quantified at Rs. 265.5 lacs and that of the 2nd respondent group at Rs. 436,49 lacs. On the basis of these investments, it was also decided that the shares of each group in the stock of the company was 62,15% in case of Bais group and 37.85% in case of the petitioner group. After this conciliation, by a letter dated 29.5.2000, the 4th respondent unconditionally withdrew the letter dated 28th May, 2000 removing the petitioner as the Managing Director. However, the respondents failed to implement the terms of the conciliation and continued to withdraw funds from the company for their personal use. When the petitioner objected, by a letter dated 16.12.2000, he was intimated that he had been removed from the post of Managing director and also as a director of the company. The removal of the petitioner as the Managing Director and also as a Director is a grave act of oppression against him especially when he holds 49% shares in the company. Further, non delivery of shares scripts is also oppressive to him and as such the reliefs sought for should be granted.
4. In brief, the reply filed by the respondents states: The petitioner is not a shareholder of the company as no shares were allotted to him. Presently, the share capital of the company consists of only two shares allotted to the 3rd and 4th respondents at the time of incorporation of the company. No Board Meeting was held on 15.7.1999 and therefore the question of allotting any shares to the petitioner in that alleged meeting does not arise. Therefore there is no compliance with the provisions of Section 399 of the Act according to which only a shareholder can file a petition under Sections 397/398 of the Act. It is true that the petitioner had invested a sum of Rs. 148 lacs but the same was only as share application money as is evident from the Balance Sheet as on 31st March, 2000 which also reflects the paid up capital as Rs. 20/-, Therefore, this petition deserves to be dismissed. As far as withdrawal of funds from the company by the 3rd and 4th respondents are concerned, such withdrawals were on the basis of understanding between the parties and as a matter of fact, whatever amount was withdrawn before the conciliation, they were to be adjusted against the funds inducted by the respondents. As far as withdrawal after the conciliation is concerned, such withdrawals were in accordance with the terms of the conciliation. Even the petitioner had withdrawn from the company in terms of the same conciliation. Therefore, the question of siphoning of funds of the company by the respondents does not arise. Further, during the period when the petitioner was the Managing director, he had purchased certain equipments from his own firm at exorbitant prices and has also dumped on the company, certain unwanted and outdated equipments and in the process his firm had received about Rs. 88 lacs from the company. Thus, in breach of his fiduciary duties, he had enriched his own firm to the tune of about Rs. 88 lacs at the cost of the company. This is nothing but siphoning of funds of the company for his personal benefit. In addition, the petitioner owes a sum of about Rs. 80 lacs to the 2nd respondent on account of some personal loan. There are certain other payments made on behalf of the petitioner by the company. In total, the amount recoverable from the petitioner comes to about Rs. 225 lacs as against his investment of Rs. 148 lacs by way of share application money and Rs. 41 lacs by way of unsecured loans. Thus, the company has to recover about Rs. 36 lacs from the petitioner and therefore the question of allotment of any shares to the petitioner does not arise. The petitioner was removed as the Managing Director/Director only because of his acts in breach of his fiduciary duties. Therefore, not only the petition deserves to be dismissed as not maintainable in terms of Section 399 of the Act, but, even on merits, the petition deserves to be dismissed.
5. When the petition was mentioned on 31.1.2001, an ex-parte order was passed in the following terms: "Considering the facts and circumstances of the case, for the present, we are only restraining the respondents from dealing with the assets of the company and directing the company to give inspection of the statutory records of the company to the petitioner within a week". It appears that in terms of this order, inspection was given to the petitioner. In the hearing held on 8.2.2001, this Bench suggested that, to put an end to the disputes, that the investment made by the petitioner could be paid back to him but in the hearing held on 27,2.2001, the respondents reported that they were not agreeable to the said suggestion. However, in the hearing held on 3.8.2001, both the sides submitted that they would attempt at an amicable settlement and the same was repeated in the hearings held on 15.10.2001, 9.8.2002 and 20.1.2004. However, in the hearing held on 17.5.2004, the counsel reported that the compromise efforts had failed. Accordingly, the matter was fixed for hearing on merits on 31.8.2004. In the meanwhile, the petitioner filed CA 171 of 2004 complaining that the respondents, in breach of the order dated 31.1.200, had handed over the land, building and management of the company to M/S Wockhardt Hospital Limited by a Memorandum of Agreement dated 22.4.2004. In terms of the Agreement, Wockhardt has already taken over the management. The respondents were proposing to launch Wockhardt Hospital on 10.7.2004. Since such handing over of the hospital was in violation of the interim order passed by this Bench, the respondents should be restrained from implementing or giving effect to the MOU dated 22.4.2004 and they should also be restrained from launching the said hospital and appropriate action against the respondents for committing contempt should be taken. After hearing the parties, the following order was passed on 9.7.2004: "Heard on the application. With the consent of both the sides, it is directed that in the function organized on 10.7.2004, there shall be no announcement in the meeting that Wockhardt hospital has been launched or inaugurated and no publicity will be given to that effect". The respondents orally undertook to remove Wockhardt name plate Board from the hospital premises. In the same order, the respondents were directed to file replies to the application and the application was to be heard along with the petition on 31.8.2004. On 28.7.2004, the petitioner filed CA 195 of 2004 complaining that in spite of the order dated 7.7.2004, Wockhardt willfully disobeyed that order by announcing the launch of the hospital and had also given wide publicity to the same and as such proceedings under the contempt of court Act should be initiated against them. When this application was mentioned on 28.7.2004, the petitioner also complained that in spite of the oral undertaking given on 9.7.2004 that Wockhardt name board would be removed, the respondents had not done so. On that day, the following order was passed: "Application mentioned. It is rather saddening that after giving an undertaking before me and requesting me not to record the same in writing, that the Wockhardt name board will be removed from the hospital premises, after the function on 10th July, 2004, it is complained by the petitioner that the board is still continuing, I direct that this board should be removed latest by 5.00 PM tomorrow i.e. on 29.7.2004 and an affidavit to that effect faxed to this Board''. The respondents filed application CA 200 on 29.7.2004 seeking for modification of the order dated 28.7.2004 and to permit placement of Wockhardt name board on the hospital premises. All the applications were directed to be heard along with the petition and accordingly the hearing commenced on the applications as well as on the petition on 31.8.2004.
6. Shri Gopal Jain appearing for the petitioner read through the petition and contended that in terms of the minutes of the Conciliation meetings the respondents themselves had agreed that the petitioner was entitled to 30% shares in the company and therefore now they cannot claim that petitioner is not a shareholder and as such the petition is not maintainable. Further, since in terms of the minutes of the Conciliation meeting, the petitioner is to be the Managing Director of the company, the respondents could not have removed him as such. Therefore, the reliefs sought for in the petition should be granted. He further submitted that before any order is passed on the merits of the case, the contempt applications filed by the petitioner should be decided.
7. Shri Uday Lalit, Sr. Advocate appearing for the respondents submitted: The petitioner has no locus standi to file this petition as he is not a shareholder. There was no Board Meeting on 15.7.99 and therefore the question of allotment of any shares to the petitioner on that day does not arise. There are .only two shareholders in the company each holding one share. Even as late as on 31.3.2000, the investment of Rs. 148 lacs made by the petitioner is shown as share application money in the Balance Sheet. As a matter of fact, during the pendency of the present petition, the petitioner has filed a civil suit claiming for repayment of all the investment made by him in the company. If he had already been allotted shares as claimed by him, he could never ask for the repayment of his entire investment in the company. The petitioner, other than averring that shares were allotted to him on 15.7.99, has not produced any evidence that shares were allotted to him, like allotment letter, copy of the resolution of the Board, copies of return of allotment filed with the ROC etc. The Minutes of the Conciliation meeting specifically record that the amount due by him to Dr. Bais of about Rs. 80 lacs could be adjusted against the petitioner's investment in the company. This itself would show that no allotment of shares had been made to the petitioner. Since the petitioner was MD at the relevant point of time, if there were any Board resolution allotting shares, he should have produced the same. Even in the Memo of Conciliation, it has only been indicated that the investment of the petitioner in the company was Rs. 265 lacs and there is no reference regarding his share capital in the company. As late as on 4th June, 2003, the petitioner had given a telegram to the company seeking for refund of share application money of Rs. 1.48 crores on the ground that there had been unreasonable delay in allotment of shares and as such he was revoking his offer to purchase the shares. The respondents have brought this communication to the notice of the Civil Court also in their Counter This being the case, the question of the petitioner maintaining the petition as a share holder does not arise. Further, in the civil suit, the respondents have made counter claims against the petitioner, which if allowed, would make the petitioner's investment in the company as nil. In the first civil suit filed by the petitioner, he has sought for refund of Rs. 148 lacs being the share application money and Rs. 41 lacs given by him by way of loan. In the second suit, he has sought for payment for certain equipments allegedly supplied by the company. Since the petitioner has chosen to recover the money invested by him for shares in the civil suit, he cannot claim himself to be a shareholder. Having sought for repayment of his investment both in the civil suit as well as by his telegram dated 4,6.2003, he cannot even ask for allotment of shares. The normal rule of law is that on the same set of facts, one cannot seek two remedies through different fora. Therefore, not only the petitioner had no locus to file this petition as he was not a member, but, assuming that his investment was kept as share application money and therefore he could claim to have locus, after his notice for refund of the share application, money, he has definitely no locus now to continue with the petition. As far as his position as MD is concerned, the same cannot be agitated in a proceeding under Sections 397/398 of the Act. Even otherwise, in terms of the Minutes of Conciliation, he was only to be a director and not as MD. He was removed as MD/Director only because of his siphoning of funds of the company by way of supply of unwanted/outdated equipments to the company at inflated cost. The petitioner was to supply equipments to the hospital through his partnership firm Ekvira Surgical Company on "no profit no loss basis". However, he has supplied equipments at exorbitant prices. For instance, he supplied one Intra Aortic Balloon Pump which was imported by his firm to one Dr. K.G, Deshpande Memorial Center. This Center rejected the same as being outdated. Even though, he imported this equipment for Rs. 8.7 lacs, his firm gave a quotation to the company for Rs. 15 lacs. However, it billed the company for Rs. 17.5 lacs at the time of supply of the equipment. Thus, by selling a rejected outdated equipment, his firm was benefited to the tune of Rs. 17.5 lacs at the cost of the company. Likewise, his firm supplied one Electro Physiology Lab which is very expensive and which is not required by the hospital as a compulsion. His firm supplied the same to the hospital for Rs. 50 lacs. So far no documentation in respect of this equipment has been furnished by the petitioner in spite of repeated demands. This equipment has been hardly used in the hospital. Since the petitioner was the sole decision maker in regard to purchase of equipments etc., he has acquired this equipment from his own firm. Out of Rs. 3 crores of loan disbursed by SBI, the. petitioner had diverted Rs. 1.12 crore towards these outdated and unwanted equipments to his own firm and had thus put the company into great financial difficulties. That is why he was removed as a director in December, 2000. Further, the Supreme Court has held that removal of a person as a director cannot be agitated in a petition under Sections 397/398 of the Act; in Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. (AIR 2001 SC 1416).
8. The learned counsel further submitted: The allegation relating to withdrawal of funds of the company for personal use of the 3rd and 4th respondents is unfounded. All the withdrawals made before the Conciliation was taken into account while fixing the contribution by the respondents group and after the Conciliation, the respondents were withdrawing Rs 15,000 per month in terms of the conciliation and no other withdrawal has been made by the respondents and as a matter of fact even the petitioner was withdrawing Rs. 15000/- per month as per conciliation. Therefore, this allegation of siphoning of fund is unsustainable.
9. As far as various contempt applications are concerned, the learned counsel submitted: The respondents never intended to disobey any orders of this Board. The order dated 31.1.2001 has only restrained, the respondents from dealing with the assets of the company. The respondents have not dealt with any assets of the company. No doubt, the respondents had entered into a Memorandum of Understanding dated 22.4.2004 with Wochardt in the form of a management agreement, but it cannot be termed as dealing with the assets of the company. In terms of the management contract, Wochardt has been given the right to use the premises including the land and building and equipments and furniture thereat. It was specifically provided that the agreement was not to be understood to be one of lease or tenancy. It also provides that if the company were to sell its immovable and movable property in the hospital, Wochardt would have the right of pre-emption to purchase the same at market value. All these terms would indicate that Wochardt had been permitted to manage the hospital and such arrangement cannot be considered to be dealing with the assets of the company. The terms of the restraint order would only apply in case of sale or mortgage of the assets of the company and not a case of handing over the management. This agreement does not confer any right on Wochardt in respect of the assets of the company. The order dated 31.1.2001 was an ex-parte order and since the company never intended to deal with the assets of the company, it did not seek for either vacation or modification of the said order. Since the company was in serious financial difficulties, it decided to enter into a management contract with Wochardt. Accordingly, a draft management agreement was prepared wherein it was specifically indicated that the agreement would be effective 15 days from the date the Company Law Board either disposes of the proceedings initiated by the petitioner or permits the respondents to enter into the agreement. Therefore, the respondents were conscious of the interim order of this Board. Instead, the company only entered into a MOU on 22.4.2004 with a currency of 6 months period. The MOU specifically says that if no permission is granted by this Bench, Wochardt would walk out of the management without any claim against the company. This itself would show that the company has not dealt with the assets of the company in favour of M/S Wochardt. Even the original agreement which was yet to be signed, does not amount to in any way dealing with the properties of the company. Therefore even the allegation of the petitioner that the respondents have acted in breach of the interim orders of this Bench is incorrect. Further, an act could be considered to be an act of contempt only if it is intentional and in breach of the orders of the court. However, if this Bench were to hold that the respondents have acted in breach of the interim orders, the respondents tender their unconditional apology and they hold every institution of justice including this Board in highest esteem and have unwavering faith in the concept of rule of law.
10. Summing up his arguments, the learned counsel submitted that not only the petition is not maintainable in terms of Section 399, the petition has to be dismissed on merits also since none of the allegations has been established and also for that reason that a fraudulent person is not entitled for any discretionary relief by this Bench.
11. In rejoinder, Shri Choudhary submitted: None of the arguments of the learned counsel for the respondents is correct or legally sustainable. The Balance Sheet produced by the company as on 31st March 2000, is a cooked up document prepared solely for the purpose of the amnesty scheme launched by the Central Government and as such no reliance should be placed on the same. To determine the locus standi of the petitioner, it is to be examined whether the company has treated the petitioner as a shareholder. In Banford Investment Ltd. v. Magadh Spun Pipe Limited (93 CC 685), the Company Law Board has prescribed certain tests to determine whether a person is a member of a company or not. One of the tests prescribed is whether the company has treated a person as a member. In the present case, the petitioner had always been treated as a member of the company and had also been appointed not only as a director but also as the MD. The plea of the respondents that there are only two shareholders holding one share each of Rs. 10/- each is fallacious. When over Rs. 7 crores have been invested in the company by the petitioner and the 2nd respondent, to claim that the company is having a capital of Rs. 20 defies any logic and common sense and therefore should be rejected. It is evident from the Memo of Conciliation that the petitioner was not only to invest but also to participate in the project as the leader of the institution and was to have 50% shares in the company. It is not denied by the respondents that the petitioner had in fact invested Rs. 148 lacs towards the shares. This amount was invested in 1997. Showing this amount as the share application money for debt equity ratio purposes, the company has taken loans from the banks. Having taken the benefir of this investment, even as share application money, now the respondents cannot claim that the petitioner has no locus to file this petition. There was in fact a Board Meeting on 15.7.1999 and shares were allotted to the petitioner but since the respondents were keeping the records of the company, they have either suppressed the minutes of that meeting or have destroyed the same. The fact that the company has treated the petitioner as a shareholder is evident from para (I) of the Memo of Conciliation wherein it is stated that "on the basis of this, share of each group in the stock of the company comes to 62.15% in case of Bais group and 37.85% in case of Pande group ". Again in Para 'O', it is stated "It was agreed by the parties that the figure arrived at by and between them would be treated, as agreed figure for future accounting and no party would be entitled to dispute the same ". Again, in para (s), it is stated "The parties agreed that the person amongst whom the parties would distribute their respective shareholding are nominated in the list attached herewith. If the parties want to transfer their shares to persons other than those figuring in the list attached, the other party shall have a right of preemption to purchase the shares at a market value". These terms would indicate that the petitioner was always treated as holder of shares in the company. In the written statement in the civil suit, the respondents, while challenging the claim made by the petitioner for refund of his investment have averred "In any case all that he is entitled to as agreed by him in terms of Minutes of Conciliation meeting dated 29.5.2000 as 30% shares in the equity of the defendant, if the specialityter claim of the defendant does not succeed". Having said so in the civil suit, the respondents cannot now turn around and claim that the petitioner is not a shareholder. The respondents have relied on the telegram sent by the petitioner on 6.6.2003 seeking for refund of all the investment in the company to state that since he has revoked his offer for shares, he cannot be allotted any shares. However, in the written statement in the civil suit, the respondents have averred "Under the circumstances, there is no question of any delay and there is no question of any offer being revoked. The telegram dated 6.6.2003 does not even deserve a place in the waste paper basket". Having said so in the civil suit, the respondents cannot rely on the said telegram. It was sent only because of the abnormal delay in the allotment of shares. The respondents are approbating and reprobating. In the civil suit, the petitioner applied for attachment of properties of the company,. While dismissing the application, the civil court has observed in its order "The learned counsel for the defendant point out that the plaintiff' has mentioned in para (6.6) that shares were issued and allotted to the petitioner/plaintiff in the Board Meting dated 15. 7.1999. In view of this assertion and admitted fact such demanding of the amount of share money of Rs. 14,95,998 is irrelevant and the said deal is irreversible. The plaintiff cannot be permitted to ask for share money rather sell it to the prospective purchaser. In the background of this situation, the suit claim for refund of share application money is not sustainable. Once the plaintiff issued an allotted shares, he cannot get money back and the remedy is not available to the plaintiff as claimed in the suit". Having asserted in the civil suit that shares were allotted and that the money invested in the shares cannot be refunded, the respondents are now estopped from claiming that no shares were either allotted or could not be allotted. In Controller of Insurance v. Vanguard Insurance Company Ltd., (AIR 1966 Mad. 437), the court has held that a person cannot be permitted to take two different stands on the same issue in two different courts as the principle of estopple would apply. Since the CLB is a court of equity, it should take into consideration all aspects of this case and hold that the petitioner is a shareholder worth Rs 148 lakhs. In World Wide Agencies Pvt. Ltd. v. Mrs. Margaret T. Desor 67 CC 607), the Supreme Court has held that to maintain a petition under Sections 397/398, it is not always necessary that the petitioner's name should be in the Register of Members. In Sri Balaji Textile Mills Pvt. Ltd. v. Ashok Kavle (66 CC 654) the Court has held that the term "Member" appearing in Sections 397/398 and 399 should be understood in the context in which It is used and it is not open to the contesting respondents to contend that for the purpose of Sections 397/398, a shareholder must comply with condition precedent stipulated in Sections 41(2) of the Act and whether a person is a member or not would depend on the circumstances of each case. In the present case, there is absolutely no doubt that the petitioner is a member of the company. The prayer of the petitioner is that he should be declared to be a shareholder to the extent of 30% shares in the company in terms of the Minutes of Conciliation meeting . Once it is done so, the civil suit which was filed subsequently with a view to avoid the problem of limitation, would become infructuous. The respondents cannot rely on the suit to un-suit the petitioner in the present proceedings as the present proceeding was filed earlier to the civil suit. The involvement of the petitioner with the company is evident from the fact that the petitioner's firm had given an undertaking to Bank of Baroda to pay over dues out of the total amount of Rs. 1.2 crores to be received by the firm from the company towards the cost of equipments supplied.
12. As far as the alleged supply of unwanted/outdated equipments at inflated cost is concerned, the learned counsel submitted: The entire allegation is baseless. It is a fact that Intra Aortic Baloon Pump was imported for Dr. K.G. Deshpande Memorial Center. Initially this Doctor was to join the project of the company. Therefore in consultation with the 2nd respondent, this equipment was purchased for the hospital. It is not correct to say that this equipment was rejected by Dr. Deshpande. The 2nd respondent was fully aware of the circumstances in. which this equipment was purchased. Originally, the petitioner's firm gave a quotation for Rs. 15 lacs. It was only an estimated price and in the quotation itself it was specifically mentioned that taxes and other charges would be extra. The invoice price of Rs. 17.5 lacs included all the taxes and other charges. Therefore, it cannot be said that the difference between the quotation and the invoice has been pocketed by the petitioner. The respondents have alleged that as against the imported price of about Rs. 8.7 lacs, the petitioner has charged Rs. 17.5 lacs and thus over priced the equipment. The price of Rs. 8.7 lacs was a concessional price on the understanding that the purchaser would purchase certain minimum number of balloons. When no commitment could be given for a minimum number of balloons for the hospital, the price of Rs. 8.7 lacs was not applicable. Therefore, it is wrong to contend that the petitioner has enriched his firm at the cost of the hospital. In so far as EP Lab is concerned, the respondents have complained that the said equipment was not an essential equipment and just to dump the equipment available with the petitioner's firm, he had purchased the same for the hospital. This allegation is baseless. Since the hospital is an exclusive and a dedicated cardiac unit, it was decided to purchase EB Lab. In his letters dated 13 Feb. 1998 (Annexure 'I' & 'J'), the 2nd respondent has himself acknowledged the need to have this equipment. It is on record that this equipment has been used in the hospital. Therefore the allegation that an unwanted equipment had been purchased by the petitioner is not correct.
13. I have considered the pleadings and arguments of the counsel. Before I deal with the maintainability of the petition and merits of the case, I shall deal with the alleged contempt committed by the respondents by acting in breach of the interim order of this Bench dated 31.1.2001. The settled law in respect of violation of an interim injunction by a court as propounded by Madras High Court in Cemtury Flower Mills Ltd. v. Suppaiah (AIR 1975 Mad 270) as approved by the Supreme Court in DDA v. Skipper Construction Pvt. Ltd. (89 CC 362) is that where an act is done in violation of an order of stay or injunction, it is the duty of the court, as a policy, to set the wrong right and not allow the perpetuation of the wrong doing and that the inherent power of the court is not only available in such a case, the court is bound to exercise it to undo the wrong in the interest of justice. In that case, the court had restrained holding of a meeting and when the meeting was held in spite of that injunction, the court refused to recognize the meeting as a legal one and it put back the parties in the same position as they stood immediately prior to the service of the interim order. In the present case, in terms of the interim order, the respondents had been restrained from dealing with the assets of the company. Therefore, the question to be examined is whether by entering into the MOU dated 22.4.2004, wherein the management of the hospital had been handed over to Wochardt, the respondents had acted in violation of that order. The company and Wockhardt Hospital Ltd. had entered into a draft Management Agreement by which the management of the hospital was to vest in Wochardt for a period of 10 years. This agreement was to be executed after certain conditions precedent are completed. One of the conditions precedent is that either the present proceeding before this Board is disposed of or the permission of this Board is obtained for entering into this agreement. Since, this condition precedent had not been completed, the parties entered into an MOU on 22nd April, 2004 effective for a period of 6 months extendable by another 3 months at the option of Wockhardt. According to the petitioner, since the terms of the draft agreement practically vests all the assets of the company with Wockhardt, and this MOU being a prelude to the same, the respondents have acted in breach of the interim order of this Bench. It is to be noted that the draft agreement has not been implemented yet and therefore, my consideration would be limited to the MOU as to whether, by entering into the MOU and giving away of the management control to Wockhardt, the respondents have acted in violation of the interim order. The main purpose of the said interim order was to ensure that during the pendency of the petition, the assets of the company are kept in tact to ensure that the respondents do not fitter away the assets of the company which could be detrimental to the interest of the company. Dealing with assets would normally mean either outright disposal, creation of any charge on the assets or leasing out of the assets. The unit of the company is a hospital having its own premises and equipments. By the MOU, it is seen that Wochardt would manage the affairs of the hospital and would pay a sum of Rs 2.5 lakhs every month to the company. Management of the hospital would naturally include using the building and the equipments. The term of the MOU is only for a period of 6 months extendable by another 3 months. In other words, the MOU cannot be considered to have vested in Wochardt any right to continue to use the premises and equipments either for a long period or for an indefinite period in which case it could be argued that the assets of the company had been dealt with. The counsel for the petitioner pointed out that Wochardt has already spent nearly a sum of Rs. 48 lacs on the premises/equipments to suggest that the arrangement is a long term arrangement. From the very provision in the MOU that Wochardt would walk out without any compensation in case this Bench does not give its permission would indicate that the investment by Wochardt is at its own risk and that investment does not vest Wochardt with any right over the assets of the company. Thus it appears to me that there is no violation the interim order. Yet, When Caluse 8 of the MOU contains a undertaking by the respondents that they would produce the MOU along with a copy of the draft agreement, it would have been appropriate for the respondents, by way of abundant caution to have approached this Bench before implementing the MOU. Any way, since I am of the view that by entering into an MOU, the respondents have not violated the interim order of this Bench and since the respondents have also otherwise tendered their unconditional apology, I close CA 171 of 2004, accepting the unconditional apology.
14. As far as the merits of the case are concerned, even though in the petition, the allegations relate to the removal of the petitioner as the Managing Director/Director and alleged siphoning of funds by the 3rd and 4th respondents, the main grievance as evolved during the hearing is about the shareholding of the petitioner. According to the respondents, the company has only two shareholders each holding one share of Rs. 10/- each and for this contention they rely on the balance sheet as on 31.3.1000 wherein the money invested by the petitioner and the 2nd respondent is shown as share application money. But at the same time, in the Chartered Accountants certificate at dated 30.8.1998 (Annexure G) the 2nd respondent is shown to hold shares worth Rs 123.4 lakhs and his wife Rs 30 lakhs worth of shares. Only in respect of the petitioner, it is shown that an amount of Rs 143.35 lakhs as pending allotment. If this certificate is correct, then the paid up capital of the company cannot be Rs 20 as shown in the Balance Sheet as on 31.3.2000. According to the petitioner he was allotted shares worth Rs. 148 lacs in a Board Meeting held on 15.7.1999 while according to the respondents there was no Board Meeting on that day and no shares were allotted to the petitioner. On this contention, they have also questioned the maintainability of the petition in terms of Section 399 of the Act. It is a fact that other than asserting that he had been allotted shares, the petitioner has not been able to substantiate the same with any documentary proof like copy of the Board resolution, share certificates, return of allotment etc. But considering the fact that the 2nd respondent and his wife were shown to have been allotted shares in the Chartered Accountants certificate, but not in the balance Sheet as on 31.3.2000, it is apparent that there is manipulation of the records of the company and therefore the possibility of the petitioner having been allotted shares as claimed by him cannot be ruled out. Even otherwise, the circumstances of the case indicate that he petitioner has to be a member of the company with substantial stake. It is an admitted fact that the petitioner was approached for financial assistance together with managerial responsibilities and was appointed as a director/MD. He has admittedly invested Rs 148 lakhs for allotment of shares. In the civil court has recorded the stand of the respondents as "The learned counsel for the defendant point out that the plaintiff has mentioned in para (6.6) that shares were issued and allotted to the petitioner/plaintiff in the Board Meting dated 75.7.1999. In view of this (Sic) and admitted fact such demanding of the amount of sha(sic) of Rs. 14,95,998 is irrelevant and the said deal is irreversible (sic) plaintiff cannot be permitted to ask for share money rather sell (sic) the prospective purchaser. In the background of this situation, the suit claim for refund of share application money is not sustainable. Once the plaintiff issued an allotted shares, he cannot get money back and the remedy is not available to the plaintiff as claimed in the suit". This shows that the respondents have taken the allotment claimed by the petitioner as an "admitted fact". They cannot approbate and reprobate. Further, in the Minutes of Conciliation meeting, it is indicated that the petitioner had a 37% stake in the stock of the company and after adjustment of the loans given by the 2nd respondent, the petitioner would, have 30% shares in the company and he was also asked to indicate the names of his nominees for transfer to these shares. Thus there is preponderance of probabilities of allotment of shares in favour of the petitioner. Assuming that no shares were allotted to him, whether he could be considered to be member of the company to maintain this petition. The admitted fact is that he had invested substantial amount for the shares, shown as share application money. The name of the hospital was changed to a name similar to that of his firm "Ekvira" indicating very clearly the intention of the parties that the petitioner was to be closely associated with the company. He was appointed as a director/MD with substantial powers. It is on record that the building in which the hospital is housed belongs to the 2nd respondent and as a matter of fact it was he who initially started the hospital. The fact that the 2nd respondent is the prime mover of the company is evident from the averment of the 3rd respondent in his reply to the petition wherein he has averred "It is for the reason that when the company was incorporated in the year 1994, respondent No. 3 and 4 were made promoter directors of the company and respondent No. 2 in his name was allotted no shares". The 2nd respondent has claimed the petitioner as the co-owner of the hospital in his letter dated 13.2.1998 to Dr. Naresh Trehan (Annexure T). On 10.3.98, the authorized capital of the company was increased from Rs 1 crore to Rs 3 crores, the purpose (sic) shares against, the pending application money. (sic) of some one having given loans and claiming shares a (sic) The petitioner's investment, admittedly was towards. From the chronology of events, it is apparently clear that the (sic) which had nil turnover till 1998 was converted into a specialty heart hospital effective from 13.7.1998 after the joined the company and from nil turnover, it earned substantial income of Rs. l.59 crores during the year 1998-99 and Rs. 3.17 crores during the year 1999-2000. Under these circumstances, it is to be examined, in view of the assertion of the respondents that no shares were allotted to the petitioner, as to whether the petitioner can maintain this petition in terms of Section 399, according to which only a member can file a petition under Sections 397/98. The main object of proving certain requirements in Section 399 is that only a person who has stake in the company should have the right to file a petition under Sections 397/398. The stake is membership. In the present case, the intention of the company that shares were to be allotted to the petitioner is evident from the fact that his investment was being shown as application money for over a period of two years(assuming that no shares were allotted to him in the Board meeting on 15.9.1999) Since allotment of shares against the application money is within the power of the Board, by not allotting shares for over two years against the application money, the respondents cannot un suit the petitioner in the present proceeding on the ground that he is not a member of the company. This Board is a court of equity and the matter has to be considered on equitable grounds. I have held that, allotment of shares to the petitioner as claimed by him cannot be ruled out for reasons stated earlier. Even assuming that no shares were allotted to him as claimed by the respondents, yet, he has to be declared to be a shareholder of shares for the purposes of this petition as he was/is entitled to allotment of shares against application money.
15. The learned counsel for the respondents submitted that after the petitioner has withdrawn his offer for shares by his telegram dated 6.6.2003, he cannot claim any shares in the company. His argument was that even if the petition is held to be maintainable in view of the application money, now that the petitioner has withdrawn his offer for shares, he cannot prosecute the petition thereafter. The settled law is that the maintainability of the petition in terms of Section 399 has to be seen on the day of filing of the petition and subsequent changes in the shareholding is of no relevance. Further, when the respondents have taken a stand before the Civil Court that "Under the circumstances, there is no question of any delay and there is 110 question of any offer being revoked. The telegram dated 6.6.2003 does not even deserve a place in the waste paper basket", they cannot low take the stand that having revoked his offer for shares, the petitioner cannot ask for shares now. He also advanced the argument that after adjustment of ail t dues against the investment made by the petitioner, it is the petitioner who has to pay substantial amount to the company and as such the question of allotment of any shares to him does not arise. This argument has to be straightway rejected. Share application money can be adjusted only in two ways - one by way of allotment of shares and second- by way of refund of the amount, The question of adjusting the share application money against any other dues is not permissible. Even lien can be kept only on partly paid shares, that too, only relating to called up and unpaid money on the shares. It is surprising that the respondents claim adjustment against the share application money of even some personal loan taken by the petitioner from the 2nd respondent without realizing that the company cannot be a party to a transaction between two individuals in their personal capacity. Further, the respondents' allegation is that the petitioner had dumped EP Lab which is not a necessary equipment for Rs. 50 lacs and therefore this amount has to be adjusted against the investment made by the petitioner. It is on record that EP Lab was supplied in the year 1998 and as per Annexure R-27, procedures were performed by using this equipment right from Jan. 1999 and till 23.5.2001, 22 procedures had been performed using this equipment. The respondents have not indicated the revenue collected by the company in conducting these procedures. It is rather surprising that having kept the equipment and using the same without returning to the petitioner, the respondents seek to adjust the cost of this equipment against the investment made by the petitioner on the ground that the said equipment is not an essential one. No where, the respondents have alleged that this equipment is either over billed or that it is sub standard or defective other than stating that documents related to this equipment had not been given by the petitioner. Further, the 2nd respondent being a Doctor by profession and who has taken interest in procurement of equipment for the hospital as is evident from his letter to the petitioner date 13.2.98 (Annexure J), would have kept quite if he was aware that the said equipment was not needed in the hospital. The Conciliation took place on 29th May 2000, that is, nearly 2 years after this equipment was supplied, but there is no reference to the same in the Minutes of Conciliation meeting and no adjustment towards the cost of the same is found in the same. Therefore as far as this equipment is concerned, I am of the view that all the allegations relating to this equipment are an after thought to be used only present proceeding. As far as RF Abulator is concerned, the grievance of the respondents is that even though the cost of this equipment of Rs. 18 lacs was paid in 1998, the same was supplied only in June 2000 and by keeping this amount for two years, the petitioner has enriched himself. There, is also an allegation relating to Baloon Pump that the petitioner by supplying outdated equipment at an inflated price has enriched himself to the tune of Rs 8 lakhs. Even assuming that the petitioner has defrauded the company, yet, the alleged defrauded money cannot be adjusted against the application money and the respondents have to pursue appropriate legal remedies, if so advised. In this connection, I may refer to para 4 of the sur-rejoinder filed by the respondents wherein they have averred " The petitioner has stated in para 26 of the rejoinder on page 54 that he is agreeable to abide by the conciliation settlement and that the respondents are seeking to wriggle out of the said conciliation settlement. I say that this is false. The respondents were always ready and willing and even today ready and willing to abide by the conciliation settlement subject to the petitioner himself abiding by the conciliation settlement and constituting proportionately to the project along with Dr. Bais group. It was he who was supposed to give the names of persons in whose name he wanted shares of the value of his 30% to be allotted and that he did not give the names is evident from the communication of one of the conciliators dated 23.7.2000". From this averment it appears that the respondents' allegation of fraudulent acts by the petitioner and denial to him of the shares stem from the alleged refusal by the petitioner to abide by the terms of Conciliation. Therefore, since I have held in the earlier paragraph that the petitioner was/is entitled to shares against the share application money, he has to be treated as a shareholder of the company for the purposes of Section 399 and as such I hold that the petition is maintainable. The petitioner has claimed 30% shares in the company on the basis of the Minutes of Conciliation meeting wherein certain amount has been quantified as his contribution towards equity. This Bench cannot take cognizance of the same as it was a private one without the company being a party. I can take cognizance of only the amount shown as share application money in the books of accounts of the company.
16. The petitioner has made two allegations in this petition that he has been removed as the MD/director and that the 3rd and 4th respondents are guilty of siphoning of funds of the company. As I have earlier observed, the affairs of the company are not being carried on in a manner prescribed by the statute. As far as the alleged withdrawal of furies by the 3rd and 4th respondents are concerned, I am satisfied with the explanation given by these respondents and as such nothing survives in this application. As far as the removal of the petitioner as the MD/Director is concerned, I find that no prescribed procedure in accordance with law has been followed. It is an admitted fact that the petitioner was appointed as the MD for a period of 5 years effective from 1.1.1998 as evidenced by Form No. 32 at Annexure-2. It is not clear as to whether he was so appointed by the Board or by the general body. If at all, he can be removed as MD, it should have been by way of a Board Resolution. It is seen that by a fax dated 17th May, 2000 (Annexure-5), the 4th respondent communicated to the petitioner that the majority of the board of directors had decided to suspend the petitioner's appointment as MD pending final decision whether to continue him in office. There is no reference to any Board Resolution in that fax nor any document has been produced to that effect in the present proceedings. Again, by a letter dated 29.5.2000, the 4th respondent unconditionally withdrew the communication dated 17.5.2000. For this also, no Board authority has been produced. Finally, by a letter dated 16th Dec. 2000, the 4th respondent has informed the petitioner that "You are aware that you are no more managing director or even director of Dr. Bais Surgical & Medical Institute Private, Ltd., Nagpur", How, when and in what manner, he ceased to be the MD or director has not been stated in. that communication. Even though the respondents have claimed that due to the fraudulent activities of the petitioner he was removed as a director/the MD, there is nothing on record to show when the respondents had realized/found out about the alleged fraudulent activities. When a person is induced to invest substantial funds with the assurance of participation in the management and having been appointed as a director and MD, his removal could definitely be considered to be an act of oppression. The learned counsel for the respondents relied on the decision of Supreme Court in Bagress Cereals case to contend that removal of a director cannot be agitated in a petition under Sections 397/398. In that case, the Court found that the removal of the petitioner was the only sustainable allegation and as such held that being a single act, the same could be agitated in a civil suit. In the present case, in addition to the allegation of removal, the petitioner has clearly established that he has been unjustly denied of his membership in the company, not withstanding the fact that they had admitted before the civil court that he is a member of the company. Therefore, the decision in Bagress Cereals case is not applicable to the present case. However, considering; the strained relationship among the parties, I do not consider it would be interest of the company to grant the relief sought for by the petitioner in this regard.
17. On an overall assessment of this case, the only relief that deserves to be granted is to direct the company to allot 14,75,998 shares of Rs 10 each to the petitioner and I accordingly do so. The allotment should be made within one month of the date of this order. However, in case the company, for any reason, has reservation of allotment of shares to the petitioner in view of the strained relationship among the parties, it shall refund this amount along with an interest of 6% (simple) from the date of investment till the date of payment, within 4 months of the date of this order, in one or more installments. The interest stipulated is in line with Section 69(5) of the Act even though this provision is not applicable to a private company. Within 15 days of this order the company should communicate to the petitioner, of its decision as to whether it proposes to allot shares or refund the application money with interest as directed above. The decision of the company will be binding on the petitioner. In view of certain claims made by the company against the petitioner, I am not giving any direction in regard to refund of Rs. 41 lacs invested by the petitioner by way of loans to the company, which is a part of the suit filed by him and he may pursue the same.
18. The petition is disposed of in the above terms without any order as to cost. All the interim orders stand vacated.