Company Law Board
K.J. Kumar vs Sneva Diamond Tools Private Limited And ... on 3 January, 2005
Equivalent citations: [2005]125COMPCAS26(CLB), (2005)4COMPLJ140(CLB), [2005]62SCL67(CLB)
ORDER
K.K. Balu, Member
1. The company petitions (17/2004 & 18/2004) are filed under Sections 235, 237, 397 & 398, Schedule XI read with Sections 402 and 403 of the Companies Act, 1956 ("the Act") alleging that the affairs of M/s Sneva Diamond Tools Private Limited ("SDTPL") and M/s Sneva Abrasive Tools Private Limited ("SATPL") respectively are being conducted in a manner oppressive to the petitioner and seeking interference of this Bench with a view to bringing to an end the matters complained of in the company petitions. SDTPL and SATPL are referred to as "the Companies".
2. The main grievance of the petitioner is that the respondent group initiated steps to sell the landed property of SDTPL measuring two acres and the landed property belonging to SATPL with an extent of ten acres both situated at Mambakkam village in favour of the sixth respondent in CP No. 17/04, being the fifth respondent in CP 18/04 at a low price with a view to defeat the claim of the petitioner.
3. SDTPL and SATPL are family companies, shares of which are wholly held by the petitioner and respondent group. The petitioner and respondents 2 to 4 & 6 in CP No. 17/04 are arrayed as parties to CP No. 18/04. The issues involved in these company petitions are common. Hence, both the petitions were heard together and are being disposed of by this common order.
4. Shri R. Venkatavaradan, learned Counsel appearing for the petitioner, while initiating his arguments submitted that SDTPL incorporated in June, 1972 with the object of manufacturing and selling industrial diamond products and SATPL incorporated in September, 1974 with the object of manufacturing and selling of abrasive wheels, tools and accessories, ceased to carry on any business for the past several years, thereby becoming defunct companies. The Companies' shares are owned by the petitioner, his father and brothers. The petitioner's father is no more. The respondents 2 & 3 are his brothers and the respondents 4 & 5 (in CP 17/04) are widows of the deceased brothers of the petitioner. The petitioner is complaining of the following acts of oppression and mismanagement in the affairs of SDTPL & SATPL:
The third respondent as the Managing Director of SDTPL and Director in charge of SATPL, did not file any annual return or balance sheet periodically for the past several years and defaulted to convene and hold general or annual general meetings as per the statutory requirements.
The plant, machinery and tools belonging to the Companies worth several lakhs of rupees were removed and subsequently sold by the respondent , group, proceeds of which were appropriated by them, without passing any resolution under Section 293(1)(a).
The respondents 2 to 5 claiming to be directors of SDTPL entered into an agreement on 03.04.2004 for sale of the landed property for Rs. 23,75,000/- in favour of the sixth respondent. Similarly, the respondents entered into two agreements on 03.04.2004 with the fifth respondent (CP 18/04) for sale of the lands of SATPL for a total consideration of Rs. 76^5,000/-. There is no need for sale of the assets and the sale price is rather meager. These sale transactions are without approval of the shareholders and Board of directors of SDTPL and SATPL. The respondents falsely claim to be directors by fabricating the records with the object of grabbing the immovable properties in exclusion of the petitioner of his rightful share in the Companies' property 'as an equal shareholder of the Company. The respondents in collusion with the proposed purchaser are attempting to siphon off the sale proceeds without discharging the statutory dues such as sales tax,, income tax and arrears of rental in respect of the premises of SDTPL. Any act of directors in the absence of their valid appointment will be invalid, as held in M. Moorthy v. Drivers and Conductors Bus Service P. Ltd. - [1991] 71 CC 136. The constitution of the Board of Directors is not in accordance with the provisions of the Act, as borne out by the statutory forms filed before the Registrar of Companies. The respondents have not followed the procedure prescribed for the appointment and removal of directors. The directors have no authority to dispose of the properties belonging to the Companies and the resolutions reportedly passed at the Board meeting held on 17.06.2000 are not binding upon the petitioner. When the original title deeds are in custody of the petitioner, the respondents fraudulently claim that they are lost. The petitioner is entitled to challenge the agreements in spite of the fact that he is not a party to the same as held in Abraham Mathew v. Sungkai Plantations P. Ltd. -[2004] 121 CC 137.
The respondents have not convened either the Board or general meetings regularly as borne out by the fact that they have filed the returns for several years in one year availing the benefit of the Company Law Settlement Scheme. No notices were sent to the petitioner for general or annual general meetings and in particular no notice was received by the petitioner for the purported extraordinary general meeting held on 28.06.2000. The plea that the notice was returned unclaimed by the petitioner is baseless. The notice was not refused by the petitioner. These acts were held to be oppressive by the Company Law Board in Harikumar Rajah v. Sovereign Dairy Industries Limited - (1998) 4 Comp LJ 252 (Mad). The respondents by selling the assets of the Company are attempting to wind up the Companies in which case they are bound to follow the procedure prescribed under Section 484 and other relevant provisions of the Act. The petitioner is willing to offer more price than offered by the proposed purchaser, which would be beneficial to the Companies and other shareholders. Shri Venkatavaradhan, learned Counsel, therefore, sought intervention of this Bench to set aside the sale agreements impugned in the company petitions.
5. According to Shri Karthik Seshadri, learned Counsel, the petitioner holding less than 20% of shares in each of the Companies approached the CLB with oblique motives by making false allegations and not with any bonafide interest in the affairs of the Companies, in order to defeat the bonafide transactions entered into by the Companies for valuable consideration with the proposed purchaser(s), being the sixth respondent (CP No. 17/2004) and the fifth respondent (CP No. 18/2004).
SDTPL and SATPL own two pieces of land comprising of 10 acres of land with a factory shed thereon, which are contiguous to one another at Mambakkam Village, on the outskirts of Chennai. SATPL owns yet another property of one ground at Guindy, Chennai.
The petitioner had earlier filed CP. Nos. 38 and 39/1996 on the file of the High Court of Madras against SATPL and SDTPL seeking orders of winding up under the provisions of section 433 (f) of the Act, which were however unconditionally withdrawn as settled out of Court on 11.02.2000 and 07.04.2000 respectively in terms of Annexure - R1 and R2. The petitioner is estopped from raising any complaints relating to affairs of the Companies prior to the date of withdrawal of the company petitions before the High Court of Madras, viz. non-holding of meetings of the Companies and non-sending of notices for such meetings, sale of machineries by the respondent group etc. Furthermore, the acts complained of are barred by limitation and the principles of res judicata.
The Companies having stopped carrying on any business activities for a very long period and the petitioner having withdrawn the company petitions in the High Court of Madras, the parties decided to dispose of the landed properties to protect them from trespassers and avoid expenses for safeguarding the properties. The Companies are private limited companies and the provisions of Section 293(1)(a) are not attracted. However, the directors of SDTPL at the Board meeting held on 17.06.2000 resolved to sell the landed property at Mambakkam as seen from copy of the minutes of the Board meeting of SDTPL (Annexure - R3 in CP No. 17/2004). SDTPL's land is contiguous to the land belonging to SATPL. The Companies decided to sell these lands as a single unit Accordingly the Board of Directors of SATPL at the Board Meeting held on 17.06.2000 resolved to call for an extraordinary general meeting on 28.06.2000 > to consider, inter-alia, the proposal for sale of the landed properties at Mambakkam as borne but by copy of the Minutes of the meeting of the Board of directors (Annexure - R3 in CP No. 18/2004). The notice dated 17.06.2000 convening the extraordinary general meeting of SATPL sent by registered post was returned unserved on the petitioner. The shareholders of SATPL at the extraordinary general meeting held on 28.06.2000 unanimously resolved to appoint the auditors, file the statutory returns for the period 1985-86 to 1999-2000 and dispose of the landed properties at Mambakkam and Guindy for better utilization of the sale proceeds. The petitioner consciously stayed away from the affairs of the Companies, forcing SATPL to appraise the petitioner in terms of a letter dated 30.06.2000, of the various decisions taken by the shareholders at the extraordinary general meeting, including the proposal in relation to the sale of the landed properties belonging to Companies, in spite of which the petitioner did not choose to evince any interest in the affairs of SATPL, but at the same time attempted to challenge the decisions of the majority shareholders. The petitioner had acquiesced to the decisions of SATPL and cannot now question the same.
The petitioner, not being a director for over 20 years does not take any interest in day to day affairs of the Companies and there has been no assistance whatsoever from the petitioner, while the respondents took the following steps:
i) to vacate the tenant from the Companies properties;
ii) to redeem the title deeds in relation to the Guindy property from the mortgagee;
iii) to convene and hold the Board as well as general meetings and file statutory returns with the Registrar of Companies upto 31.03.2002;
iv) to settle upto date statutory dues in favour of the Panchayat and other ' local bodies; and
v) to engage a watch and ward protecting the properties from any outsiders from trespassing into the properties.
When the respondents have been taking steps for sale of the properties in pursuance of the resolution of the Board of Directors of the Companies, the petitioner thwarted such efforts by effecting advertisement in the local newspapers, causing immense prejudice to the Companies and the shareholders. At present, the Companies have lawfully entered into the agreements for sale of the landed properties for proper and valuable consideration in favour of the sixth respondent (CP No. 17/2004), who is the fifth respondent in CP No. 18/2004. The properties are being sold above the guideline value and the sale proceeds would be distributed among the shareholders including the petitioner according to his shareholding in the Companies. The petitioner is interfering with the commercial wisdom of the majority shareholders and any interference at the instance of this Bench would cause serious prejudice to the Companies. Though the petitioner offered to purchase the properties at a price higher than offered by the purchasers), yet the petitioner has not chosen to deposit any amount establishing his bonafides. The petitioner is in illegal occupation of SATPL's yet another property worth more than Rs. 70 lakhs without any authority thereby causing loss to SATPL and he is bound to account for his illegal occupation of the property for all these years.
6. According to Shri T.H. Anoop, learned Counsel representing the sixth respondent (CP 17/2004), the directors of SDTPL have entered into an agreement of sale with his client on 03.04.2004 for sale of 2 acres of land in Mambakkam for Rs. 23,75,000/-, representing the market value, out of which a sum of Rs. 11,87,500/- was paid by way of advance, upon which they were put in possession of the landed property with effect from 03.04.2004.. The transaction between the SDTPL and the sixth respondent is a bonafide one and they are not concerned with the internal disputes between the shareholders.
7. Shri T.H. Anoop, learned Counsel representing the fifth respondent (CP No. 18/2004) submitted that this respondent entered into an agreement with SATPL on 03.04.2004 for purchase of 6 acres of land in Mambakkam village for a sum of Rs. 71,25,000/-, at market rate and paid a sum of Rs. 5,62,000/- as advance upon which this respondent was put in possession of the landed property with effect from 03.04.2004. This respondent entered into yet another agreement on 03.04.2004 for purchase of another 5 acres of land in enjoyment of SATPL based on adangal and B form issued by the revenue authorities for Rs. 5,00,000/- and paid an advance of Rs. 1,00,000/-. These transactions being bonafide transactions and this respondent not being concerned with the internal disputes among the shareholders, Shri Anoop, learned Counsel sought for dismissal of the company petition.
8. I have considered the pleadings and arguments both oral and written of learned counsel. The issues, which arise for my consideration are whether the petitioner has made out a case under Section 397/398 of the Act and if so, whether the petitioner is entitled for the reliefs claimed in the company petitions.
It is on record that the Companies are closely held private limited companies, shares of which are wholly owned by the petitioner, his father, since diseased and brothers. The Companies not being in operation have become defunct companies. The petitioner has been out of management for the past nearly 20 years and the Companies are under control of the respondent group. The grievances of the petitioner in the affairs of the Companies are -
non-holding of general or annual general meetings of the Companies as required under the provisions of the Act non-sending of notices of general or annual general meetings to the petitioner, whenever convened by the Companies non-convening of meetings of the Board of Directors of the Companies.
Illegal constitution of the Board of Directors of the Companies.
Illegal sale of the machineries belonging to the Companies and appropriation of the sale proceeds by the respondent group Sale of the Companies' fixed assets for a meager sum without complying with the requirements of Section 293(1)(a) Against this background the winding up proceedings initiated by the petitioner in CP. Nos. 38 and 39/1996 on the file of the High Court of Madras against SATPL and SDTPL respectively assume importance. The petitioner while seeking dissolution of SDTPL in CP. No. 39/1996, inter alia, made the following categorical averments:-
"The petitioner states that after he resigned from the Company as Managing Director in the year 1982 K. Ramachandran his brother became the Managing Director. The Company has been continuously sustaining losses. The Company had filed it Annual Returns with the Registrar of Companies upto 31.3.90 and thereafter no Returns were filed. No Annual General Meeting as required under the provisions of Company Act was held. The balance sheet after 1.4.90 had not been prepared. As the Company has been sustaining loss, no dividend was declared. There has been no compliance of the provisions of the Companies Act by the Company.
The Petitioner states that K. Ramachandran, one of the share-holders of the Company acting in collusion and conspiracy with another shareholder K. Eswaran along with V.R. Krishnamurthi, father-in-law of K. Ramachandran removed the valuable machineries belonging to the Company which would be about 40 lakhs market value without the consent and knowledge of the Managing Director of the Company. The machineries are now lying in the custody of K. Ramachandran and they are being used for the purpose of his separate business which is being carried by him along with his wife. The Company though fully aware of the removal of the machineries by K. Ramachandran $at he is in unlawful possession of the same did not take any steps to get back the machineries from him and till date the Company had allowed the machineries to remain with K. Ramachandran. It is understood that the machineries belonging to. the Company have been hypothecated by K. Ramachandran and his wife to obtain loan for the purpose of their personal business ".
The High Court of Madras, after hearing the parties in CP. No. 39/1996 by an order dated 07.04.2000 passed the following order:
1) "Counsel says that the matter has been settled out of court and that the petition is being withdrawn.
2) Petition is dismissed".
Similarly, the CP. No. 38/1996 on file of the High Court of Madras seeking winding up of SATPL was dismissed, as withdrawn by the petitioner. It is observed that the grievances set out in the company* petitions before this Bench save the constitution of the Board of Directors of the Companies and the sale of the landed properties were agitated by the petitioner before High Court of Madras as early as in the year 1996. It is further observed from page 4 of the rejoinder, (CP. No. 17/2004) that "there were certain negotiations between the petitioner and his brothers so that the matters could be easily resolved between the brothers. Accordingly, the petitions were withdrawn". The details of negotiation between the petitioner and his brothers or any future plan of action in the affairs of the companies are neither spelt out in the rejoinder nor made out in the course of oral submissions made on behalf of the petitioner. This clearly indicates that the petitioner has not evinced any interest in the affairs of the Companies, in spite of resolving the disputes with his brothers over a period of four years. At this juncture it must be borne in mind that at the relevant point of time, the companies were sustaining losses and further they ceased to carry on any activity. In such circumstances, the negotiations between the parties as averred in the rejoinder in my view may, perhaps be, in relation to sale of the assets belonging to the companies. Pursuant to amicable settlement of the disputes between the petitioner and respondent group, the petitioner buried those grievances, but are being re-agitated in the present proceedings. The allegation in regard to the purported illegal constitution of the Board of Directors of the Companies is not found to be agitated by the petitioner in the winding up proceedings, but raised for the first time before the CLB. It is on record that the Board of Directors of SATPL at its meeting held on 17.06.2000 resolved to call for an extraordinary general meeting of the members on 28.06.2000 to consider, inter-alia, the proposal to dispose the land at Mambakkam Village, land and building at Guindy, in pursuance of which notice dated 17.06.2000 convening the extraordinary general meeting on 28.06.2000 was found to be issued to the petitioner, which was however returned, as borne out by Annexure - R3, R4 and ,R5 (CP No. 18/2004) respectively. Furthermore, SATPL addressed a communication dated 30.06.2000 in favour of the petitioner by both registered post and certificate of posting apprising him of the various resolutions, including the decision in relation to the disposal of the land situated at Mambakkam as well as the land and building at Guindy, passed at the extraordinary general meeting of the members of SATPL held on 28.06.2000 as per Annexure R6 & R7 (CP No. 18/2004). Though these are all seriously contested, yet, the address of the petitioner as described in Annexure R5 and R7 is not under dispute. SATPL discharged its obligation by dispatching the notice of the extraordinary general meeting to the proper address of the petitioner. In the normal course it is not safe to trust certificate of posting issued by the, postal authorities, but in the present case, the communication (Annexure R6) having been sent to the correct address of the petitioner by registered post as well as under certificate of posting, I do not doubt the bonafides of the respondents. The Board of Directors of SDTPL at its meeting held on 17.06.2000 approved the proposal for disposal of the land and building situated at Mambakkam village, as borne out by Annexure R3. The property sought to be sold by SDTPL comprising of 2 acres of land is contiguous to the landed property belonging to SATPL, the fact of which remains undisputed. SATPL and SDTPL are wholly owned by the very same shareholders. The shareholders of SATPL authorised the Board of Directors to dispose of the landed property situated at Mambakkam village and the land and building situated at Guindy, as observed supra. In a proceeding under Section 397, it must be satisfied whether such sale of the properties is in the interests of the Companies and the shareholders. In this connection beneficial reference is invited to the principles enunciated by the apex court in Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited' - [1981] 51 CC 743, according to which, every action in contravention of law may not per se be oppressive for the purpose of Section 397 of the Act; a resolution passed by the directors may be perfectly legal and yet oppressive and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the company. Moreover, it is quite clear from the public notice caused by the petitioner in the local newspapers cautioning the public not to deal with the properties by way of purchase etc., that the petitioner is quite aware of the initiatives taken by the Companies for sale of the landed properties. Though the petitioner offered to purchase the properties at a higher price, he did not choose to show his earnestness by depositing any amount. Mere affidavit of the petitioner, in my view, does not show his seriousness in purchasing the properties as declared by him. Having found that the Companies are not carrying on any business for the past several years, that there is "irreconcilable animosity" between the parties, that expenses are inevitable to safeguard the properties, and that the properties are undisputedly being sold above the guideline value, the proposed sale, in my considered view, would be in the interests of the Companies as well as the shareholders. In these circumstances, there is no need to interfere with the corporate decision of the Board of Directors of the respective Companies. However, the Company shall ensure that all statutory and other dues owed by them are settled from and out of the sale proceeds of the properties. Furthermore, this single act cannot constitute an act of oppression in the affairs of the Companies. I do not also find any merit in rest of the contentions of the petitioner so as to exercise the jurisdiction under Sections 397 & 398 of the Act. Therefore, the claim of the petitioner in both the company petitions must fail. Ordered accordingly. In the result, the interim orders made earlier by this Bench stand vacated. With these directions, both the company petitions stand disposed.