Company Law Board
Vijayan Rajes And Anr. vs M.S.P. Plantations Private Ltd. And ... on 30 September, 1998
Equivalent citations: [1999]95COMPCAS482(CLB)
ORDER
1. The petitioners hereinabove have filed this petition under Section 397/ 398 of the Companies Act alleging various acts of oppression and mismanagement in the affairs of M. S. P. Plantations Private Limited (hereinafter referred to as "the company"). While the petitioners claim to be entitled to hold 200--4 per cent. cumulative preference shares of Rs. 1,000 each and thus qualified to apply under Section 397/398, the contention of the company is that these shares have already been redeemed and as such the petitioners are not shareholders. Since the petitioners have questioned the legality of the redemption of the preference shares in this petition and have also sought for appropriate relief on this issue, which if decided in favour of the petitioners would qualify them to file a petition under these sections, we shall be considering this issue along with other allegations.
2. According to the petitioners, they were originally holding 200 equity shares of Rs. 1,000 each in the share capital of the company of 2,500 equity shares of Rs. 1,000 each, and 200--4 per cent. preference shares of Rs. 1,000 each. Later, these equity shares were converted into 4 per cent. redeemable preference shares of Rs. 1,000 each at the extraordinary general meeting held on March 30, 1992. According to the petitioners, the business of the company was to be carried on on the principles of partnership between the first petitioner and his father, respondent No. 2 and that the former was appointed as the executive director of the company and was looking after the entire business, operation. Later he became the managing director, when the second respondent resigned from the office of managing director in December, 1991. According to the petitioners, there was a family settlement by which certain properties were divided among the family members sometime in 1993. Later, certain disputes arose between the petitioners and respondent No. 2 due to which respondent No. 2 decided to take control of the company by removing the first petitioner from the position of director at an extraordinary general meeting requisitioned by respondent No. 2. This notice of requisition was never placed before the board, but by virtue of Section 169 respondent No. 2 being the requisitionist, himself convened the said extraordinary general meeting on December 20, 1995, in which the proposals to remove the first petitioner from the board and appointing respondents Nos. 3 and 4 as directors were to be considered. The petitioners filed a civil suit before the City Civil Judge at Bangalore, challenging the purported extraordinary general meeting which was later on dismissed by that court on technical grounds. Even though the petitioners attended the extraordinary general meeting, resolutions were passed removing the first petitioner as a director and appointing respondents Nos. 3 and 4 as directors. It is also further alleged in the petition that the company, in a board meeting on March 9, 1996, decided to redeem all the preference shares held by the petitioners as well as respondents Nos. 2 and 3 and accordingly, cheques for the redemption value of the shares were sent to the petitioners which they refused to accept and returned the same to the company as according to the petitioners, the redemption was in violation of the provisions of law and was done only to oust the petitioners from the company. It is further stated in the petition that the estates of the company had been sold as they had not been managed economically and that certain investments held by the company had also been sold. Out of the consideration received on the sale of estates and the investments all the liabilities of the company were discharged and the remaining surplus amount of Rs. 22.6 lakhs were deposited in two fixed deposits of Rs. 10 lakhs each in Tamil Nadu Mercantile Bank. Later, without the knowledge of the petitioners these deposits were encashed and a sum of Rs. 20 lakhs has been withdrawn by the second respondent.
3. On the basis of the aforesaid alleged acts of oppression and mismanagement, the petitioners have sought for the following reliefs ;
(a) for conversion of the preference shares held by the petitioners into fully paid equity shares,
(b) declaration that the resolution passed at the extraordinary general meeting held on December 20, 1995, is null and void ; and
(c) for recovery of the amount taken out by respondent No. 2 from the funds of the company.
4. According to the respondents, the question of principles of partnership does not arise inasmuch as the company was incorporated in 1981, at which time the first petitioner was studying in the United States and only in 1987, the first petitioner was inducted into the board. It is further averred by the respondents that the first petitioner has obtained whatever he was entitled to out of the family properties by a family settlement and his only interest is to obtain the ownership of a building in Madras owned by the company and that the petition is a motivated one to put pressure on respondent No. 2 to settle the Madras building in favour of the petitioners. Further, according to the respondents, the business of the company has already been sold and after discharging all the liabilities, the funds available with the company have been profitably invested. As far as redemption of the preference shares and removal of the first petitioner as a director are concerned it is the stand of the respondents that the same has been done as per the provisions of law.
5. We heard the arguments of Shri Murali, counsel for the petitioners and Shri Muralidharan, advocate for respondent No. 2. Both of them elaborately dealt with the allegations. Shri Murali relied on Vijay Krishan Jaidka v. Jaidka Motors Company Limited [1997] 1 Comp LJ 268 ; [1996] 23 CLA 289 to state that :
". . .it is necessary to pierce the corporate veil to find out whether a company is a family company and whether partnership principles are to be applied".
6. According to Shri Murali, the very fact that the petitioners held 40 per . cent. shares in the company, that the first petitioner was associated with the management of the company in the capacity of managing director, and that it consisted of only father and son would show that the company is a family company and is in the nature of a partnership. Further, relying on Cosmosteels P. Ltd. v. Jairam Das Gupta [1978] 48 Comp Cas 312 (SC) it is stated that in a Section 397/398 petition, technicalities should not stand in the way of granting equitable relief. For the same proposition, he also relied on Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. [1991] 72 Comp Cas 211 (Kar) ; [1991] 3 Comp L) 336.
7. Shri Muralidharan, advocate appearing for respondent No. 2, submitted that the petitioners not being shareholders have no locus standi to file the petition. He stated that the preference shares held by not only the petitioners, but also the respondents were redeemed out of the proceeds of fresh issue of equity shares as is evident from the board resolution dated March 9, 1996. Therefore, the provisions of law in regard to the redemption of preference shares have been complied with and once the preference shares held by the petitioners have been redeemed the petitioners no longer continue as members of the company. As per the allegation of removal of the first petitioner as a director, it is stated that the majority shareholders through a resolution passed in a properly convened extraordinary general meeting removed the first petitioner and as such the wisdom of the majority shareholders cannot be impugned in a petition under Section 397/398. He also rebutted the contention of counsel for the petitioners that partnership principles will be applied inasmuch as the petitioners became shareholders of the company much after the incorporation and the first petitioner was not a signatory to the memorandum of association of the company. Further he also pointed out that the first petitioner has been in the habit of initiating various legal proceedings and he referred to the various cases that have been initiated by the first petitioner against the company/respondent No. 2.
8. We have considered the pleadings and arguments of both the counsel. Before we proceed with the various allegations in the petition, it is necessary to adjudicate on the redemption of preference shares as the locus standi of the petitioners to move the petition under Section 397/ 398 in terms of Section 399 will depend on the decision on this issue. From the special resolution passed at the extraordinary general meeting held on March 30, 1992, when the equity shares were converted into preference shares, as per para. (d) of that resolution the preference shares shall be redeemed on or before March 31, 1993, in accordance with the provisions of Section 80 of the Act. In other words, the intention at the time of conversion was that the shares should be redeemed. There is nothing in the resolution to show that these shares would be converted into equity shares which prayer the petitioner has sought in the petition. May be the shares had not been redeemed by March 31, 1993, but there is nothing in the resolution to show that the shares would be converted into equity shares. The board has in fact decided to redeem the shares on March 9, 1996, and in the same board meeting the decision to allot equity shares of equal amount had also been taken. Even though, in the replies the respondents have annexed a copy of the resolution taken dated March 9, 1996, that further equity shares have been issued and out of the consideration so received the preference shares were to be redeemed, the petitioners in their rejoinder hardly touched upon this issue except to state that a single shareholder cannot constitute a company as according to them after redemption of preference shares there was only one equity shareholder, namely, M. S. P. Investments Limited. From the resolution of the board dated March 9, 1996, it is seen that 455 equity shares had been allotted to respondents Nos. 2 and 3. If that be the case, there would be three shareholders in the company and as such the allegation of the petitioners that there would be only one shareholder after redemption of preference shares does not stand. Another objection of the petitioners is that the removal of petitioner No. 1 was illegal as also the induction of the other two directors and as such the Board was not duly constituted for taking a decision to redeem the preference shares. It is an admitted position that the petitioners attended the extraordinary general meeting held on December 20, 1995, and that they were aware that the resolution of the first petitioner's removal as well as induction of two others into the board were passed. Since these resolutions were through a requisition by one of the shareholders, viz., respondent No. 2, we cannot impugn these resolutions, unless and, otherwise, we concur with the petitioners that this company could be treated to be on principles of partnership. While no doubt this company is a family company consisting of father and son yet from the sequence of events, we find that the company was incorporated by respondents Nos. 2 and 3 in 1981, and the first petitioner came to be a shareholder only in 1987. Perhaps because of the relationship of father and son the petitioner came on the board and that itself, according to us, cannot constitute that the company has been incorporated in the garb of a partnership. Further, in the case of partnership, there should be utmost good faith and sense of goodwill between the partners. Unfortunately, in this case, as has been pointed out by respondent No. 2, the first petitioner has been in the habit of litigating with his own father who is supposed to be his partner in the company, not only in relation to the affairs of the company, but also in family matters. Therefore, we are not in a position to accept the contention of the petitioners that the redemption of preference share capital should be considered in the background of the partnership nature of the company. Since the redemption was done validly through a board resolution that too on the basis of a resolution in the extraordinary general meeting held on December 20, 1995, according to which these shares were to be redeemed, we do not find any justifiable reason to set aside the redemption. It is also on record that the redemption amount had been sent to the petitioners by way of cheques which the petitioners had not accepted. In other words, as far as the company is concerned the redemption had taken place which had been paid out of the proceeds of a fresh issue of equity shares. Once we confirm the redemption the petitioners do not continue as members of the company and as such they do not qualify to file the petition in terms of Section 399.
9. Further, during the hearing, it transpired that the interest of petitioner No. 1 (petitioner No. 2 being his wife) was that he should have the ownership of one of the flats in Madras owned by the company and as a matter of fact petitioner No. 1 who was present before us made a statement that if this flat was transferred to his name by the company he would no longer be interested in pursuing the petition. In other words, it is transparently clear that the motive of the first petitioner is to bring pressure on respondent No. 2 for transferring this building to petitioner No. 1. However, in regard to this building, he has already filed a suit before the City Civil Court, Madras. It is an established legal position that, when a petition under Section 397/398 is filed with a view to achieve some ulterior objective/collateral purpose, such a petition should not be encouraged. This legal position has been propounded in Bellador Silk Ltd., In re [1965] 1 All ER 667 (Ch D).
10. Even otherwise, of the three main allegations made in the petition, we have already given our finding on the validity of the extraordinary general meeting as well as redemption of preference shares at the time of considering the maintainability of the petition. The only issue that remains is about investment made by respondent No. 2. It transpires from the proceedings, that out of Rs. 20 lakhs deposits encashed by respondent No. 2, an amount of Rs. 18 lakhs has been invested at 18 per cent. in Sancotrans Limited and this amount has not been siphoned off by the second respondent. Therefore, there is nothing to adjudicate on this allegation.
11. It is necessary for us to point out that in view of the relationship between the parties, the first petitioner being the son and respondent No. 2 being the father, we explored whether the matter could be sorted out amicably. While the first petitioner was willing if the company allowed him to retain one of the flats in Madras in which he has been living respondent No. 2 was not willing for the same on the ground that in a family settlement arrived at by them before the civil court at Salem, substantial family property had already been given to petitioner No. 1 and that the first petitioner has already filed a suit in the City Civil Court at Chennai, in regard to the flat in question. An attempt was also made whether the first petitioner could pay some amount towards the premises, but the amount so payable could not be mutually agreed upon between the parties. Accordingly, our efforts to settle the matter amicably did not succeed.
12. Petition is dismissed. No order as to costs.