Company Law Board
T.N. Narendra And Ors. vs Lakeside Medical Centre Private ... on 20 October, 2006
Equivalent citations: [2007]137COMPCAS786(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In the company petition filed under Sections 397, 398, 402 and 403 read with Section 111 of the Companies Act 1956 ("the Act") alleging certain acts of oppression and mismanagement in the affairs of M/s Lakeside Medical Centre Private Limited ("the Company"), while the petitioners have filed a series of applications namely (i) C.A. No. 44 of 2006 for convening of the annual general meeting of the Company; (ii) C.A. No. 70 of 2006 for convening of an extra-ordinary general meeting to remove the existing directors; (iii) C.A. No. 71 of 2006 for amendment of the company petition and (iv) C.A. No. 72 of 2006 to order an investigation in the affairs of the Company, the respondents have come out with the applications namely, C.A. No. 87 of 2006 for appointment of an alternative valuer and C.A. No. 88 of 2006 for appointment of a statutory auditor.
2. Shri B.C. Thiruvengadam, learned Counsel, while arguing C.A. No. 44 of 2006 submitted that the accounts of the Company have not been audited for the year ended 31.03.2005 and 3 i .03.2006. The respondents 2 £ 3 have not taken any initiative to convene the annual general meeting of the Company. The statutory auditor had resigned one year back, but the Company now only seeks to appoint an auditor belatedly. The Company is bound to discharge its statutory obligations in the interest of the shareholders. During the pendency of the present proceedings, the first petitioner's father namely, Nanjundaiah died and his widow Honnamma Nanjundaiah inherited 280 shares which stood in the name of deceased Nanjundaiah. Though Honnamma Nanjundaiah applied to the Company for transmission of the shares along with copy of the registered will executed by her deceased husband, the Company is deliberately delaying the process of effecting the transmission of shares in her name, with a view not to allow Honnamma Nanjundaiah to participate in the annual general meeting and exercise her rights as a shareholder of the Company. The Company must, therefore, be directed to convene the annual general meeting and must be restrained from interfering with the rights of the consentor, namely Honnamma Najundaiah in exercising her right as a shareholder of the Company at the annual general meeting.
3. Shri Udaya Holla, learned senior Counsel while opposing the company application (C.A. No. 44 of 2006) submitted that (late) Nanjundaiah owed to the Company a large sums of money and in particular, he had withdrawn monies from the Company to pay the rentals to the partnership firm of Lakeside Medical Centre for the period from 1982 to 1990, but no such sums were credited to the account of the partnership firm. In view of this, the Company has the first and paramount lien by virtue of Article 8 over 280 shares belonged to (late) Nanjundaiah. Furthermore, the purported signature of (late) Nanjundaiah in the will does not tally with that of the admitted signatures contained in the records available with the Company and therefore, the Company insisted the consentor to obtain a probate and settle the claim of the Company against (late) Nanjundaiah, before effecting the transmission of shares in her favour. The right of the consentor to vote at annual general meeting cannot be adjudicated at this interim stage, and it requires adjudication of the company petition. The right of the consentor to vote at the annual general meeting is not an issue in the company petition and therefore the interim relief is beyond the scope of the final relief in support of which reliance has been placed on the following decisions:
* Cotton Corporation of India Limited v. United Industrial Bank Ltd. and Ors. to show that if the final relief cannot be granted in terms as prayed for, no interim relief in the same terms can be hardly if ever be granted.
* Ritona Consultancy Pvt. Ltd. and Ors. v. Lohia Jute Press and Ors. to show that an interlocutory order cannot be passed beyond the scope of the suit or against parties who are not parties before the Court.
* State of U.P. and Ors. v. Visheshwar (1995) Supp (3) SCC 590 to show that granting of final relief in the form of interim relief is not warranted.
* Bank of Maharashtra v. Race Shipping & Transport Co. Pvt. Ltd. and Anr. to show that Supreme Court deprecated the practice of granting interim orders which practically give the final relief sought for in the petition.
All the reliefs claimed in the present petition save the impugned allotment of shares in favour of the second respondent have been already declined in C.P. No. 32 of 2005 in which case the petitioners cannot claim any interim relief. In Patel Enterprises v. M.P. Ahuja it has been held that if a suit is not maintainable, the question of issuing any temporary injunction would not arise.
4. Shri Thiruvengadam, learned Counsel in his rejoinder submitted that (late) Nanjundaiah never owed any money to the Company and no demand was ever made during his life time in respect of the purported dues. The Company, on the other hand did not pay the rent, but provided for the same and was shown as outstanding liability. Therefore, there was no outflow of cash on account of the rent payable to the partnership. The Company made the demand illegally in order to stall the transmission of shares of (late) Nanjundaiah in the name of his wife. The Company, but virtue of Article 8, can exercise lien only against the partly paid up shares and therefore, cannot enforce the claim against the fully paid up shares held in the name of (late) Nanjundaiah,
5. Shri B.C. Thiruvengadam, learned Counsel while dealing with C.A. No. 70 of 2006 submitted that the respondents have not conducted the annual general meeting of the Company for the year ended 31.03.2005. The Company has refused to give effect to the transmission of the shares of (late) Nanjundaiah in favour of his wife, being the consenter to the petition, despite the will executed by (late) Nanjundaiah. on the ground that the signature of (late) Nanjundaiah purportedly did not tally with the signature maintained in the records of the Company. The Company further demanded illegally an amount of Rs. 82.47 lakhs said to be due from (late) Nanjundaiah. The Company exercised its right of lien over the shares and refused to transmit the shares on account of non-payment of the alleged amount due from (late) Nanjundaiah, The shares of the Company have been fully paid without calls and arrears, and therefore the Company cannot exercise lien against the fully paid up shares held in the name of (late) Nanjundaiah. The Company has been paying dividend inspite of the purported amounts due from (late) Nanjundaiah. The respondents are indulging in falsification of accounts and making fictitious demand against the estate of (late) Nanjundaiah. These developments would show that the respondents are acting in a manner to exercise control over the Company and therefore they have no right to remain on the board of the Company. Therefore, the members belonging to Kincha group and Nanjundaiah group have given the requisition to the respondents to convene an extra ordinary general meeting seeking the removal of the second respondent and other directors and replacing them by other shareholders.
6. Sri Udaya Holla, learned senior Counsel while opposing the company application (C.A. No. 70 of 2006) submitted that the meetings of the Company are being regularly conducted and that the shareholders are casting their votes in the normal course. The Company was constrained to refuse the transmission of shares in view of the fact that the signature of (late) Nanjundaiah as contained in the will purportedly executed by him did not tally with the admitted signatures available in the records of the Company Consequently, the Company advised the widow of (late) Nanjundaiah to obtain a probate issued by a competent Court of law, especially when it is within the jurisdiction of the civil Court to decide as to who are all the legal heirs of a deceased, as held in Naresh Trehan v. Hymatic Agro Equipments Private Ltd. and Ors. (1999) Vol.97 CC 561. In view of this, the application is liable to be dismissed. The Company has lien over the shares of (late) Nanjundaiah and the petitioners are exploring the possibility of exercising their votes in respect of those shares without making the payment due on such shares in favour of the Company. (Late) Nanjundaiah owed a sum of Rs. 82.47 lakhs to the Company during his life time and even thereafter and therefore the Company exercised its right of lien over the shares and refused to transmit the shares till the dues are cleared. The respondents have made a counter claim, in the civil suit in O.S. No. 10722 of 1993, against (late) Nanjundaiah for the amounts due to the Company. The present application is an attempt to usurp the control of the Company which has been performing well under the management of the respondents. The petitioners are seeking in the main petition removal of respondents 2 & 3 from the office of director. The same relief is being claimed in the present application without furnishing any new materials. Furthermore, the relief claimed by the petitioners in C.P. No. 32 of 2005 restraining the respondents 2 & 3 from participating in the affairs of the Company as directors has been rejected by this Bench and therefore they cannot claim the very same relief through the present application. In the circumstances, what is prohibited directly cannot be permitted to be done indirectly.
7. Shri B.C.Thiruvengadam learned Counsel in support of the application (C.A. No. 71 of 2006) submitted that the Company failed to convene and hold the annual general meeting for the year ended 31.03.2005. While the Bench gives directions to the Company in regard to convening of the annual general meeting, the consenter to the present company petition should be permitted to attend the annual general meeting as and when convened by the respondents. The Company by a letter dated 17.04.2006 addressed to the consenter refused to give effect to the transmission of shares of (late) Nanjundaiah despite a will made in her favour. The refusal has been on the basis that the signature of (late) Nanjundaiah did not tally, notwithstanding the fact that the said will has been registered. However, the Company advised the consenter to seek probate of the will executed by (late) Nanjundaiah. The Company has further made a claim of Rs. 82.47 lakhs said to be due from (late) Nanjundaiah and accordingly exercised its right of lien over the shares left by (late) Nanjundaiah. In these circumstances, it is essential the company petition is amended so as to enable the consenter (a) to insist for transmission of the shares of (late) Nanjundaiah in her favour, (b) to resist the claim of Rs. 82.47 lakhs made against the estate of (late) Nanjundaiah; (c) to oppose the right of lien exercised by the Company in respect of the shares of (late) Nanjundaiah and (d) to remove the stipulation of obtaining a probate of the will executed by (late) Nanjundaiah. Consequently, the Company should be directed to transmit 280 shares standing in the name of (late) Nanjundaiah in the name of the consenter namely, Honnamma Nanjudaiah. If the amendment is not permitted the consenter will be put to irreparable loss and hardship. The application for amendment of the pleadings has been filed only on 01.05.2006 after the application of the consenter for transmission of shares has been rejected by the Company.
8. Shri Udaya Holla learned senior Counsel, while opposing the application (C.A. No. 71 of 200(3) pointed out that there is no need for amendment of the petition. There has been no material produced to substantiate the application, apart from making bare allegations, and therefore, the application is liable to be dismissed as held in Devaraj Dhanram v. Firebricks and Potteries Pvt. Ltd. and Ors. (1994) Vol.79 CC 722. This Board held in Pahlaj Dhajandas Bajaj v. Microedge Technologies (P) Limited (2005 )5 CLJ 333 held that any petition is liable to be dismissed, if the allegations are unsubstantiated by evidence. The consenter is not a petitioner in the present proceedings and therefore no reliefs can be claimed by the consenter on her behalf. The consenter has not even sworn to an affidavit in support of the present application. Further the application has been signed by the first petitioner and the consenter is not a party to the proceedings. The applicants have not made out a prima facie case for grant of any prayer claimed in the present application. It is not the case of the applicant that the affairs of the Company will be prejudiced, if the application is not allowed. The present application does not fall within the scope of the company petition and does not entitle the consenter to seek any relief (Late) Nanjundaiah owes an enormous amount to the Company. The signature of (late) Nanjundaiah purportedly contained in his will does not tally with the admitted signature in the records which are in possession of the Company. By virtue of the articles of association, the Company is entitled to exercise its lien on the shares left in the name of (late) Nanjundaiah. The amendments which are sought by the applicants do not fall within the scope of the company petition. The amendment sought by the applicant is entirely on a different cause of action and therefore the amendment as sought by the applicants is not permissible It has been held in Subhash Chand Agarwal and Anr. v. Associated Limestone Ltd. and Ors. (1998) Vol.92 CC 525 that an amendmemt petition cannot be allowed to make out a fresh case, if the petitioner fails to make out the case in the original petition.
9. Sri B.C. Thiruvengadam, learned Counsel, while arguing the company application (C.A. No. 72 of 2006) submitted that the Company failed to convene the annual general meeting for the year ended 31.03.2005, compelling the consenter to file an application in C.A. No. 44 of 2006 to the effect that the consenter must be permitted to attend the annual general meeting as and when convened by the Company. The Company by its letter dated 17.04.2006 addressed to the consenter refused to give effect to the transmission of shares of (late) Nanjundaiah despite a will executed in her favour. The refusal was on the basis that the signature of (late) Nanjundaiah did not tally, notwithstanding the fact that the will has been duly registered. The Company advised that the consenter to obtain a probate of the said will left by (late) Nanjundaiah. The Company further made a claim of Rs. 82.47 lakhs against the estate of (late) Nanjundaiah and exercised its right of lien over the shares and thereby refused to transmit the shares in favour of the widow of (late) Nanjundaiah, The claim of Rs. 82.47 lakhs made by the Company is fictitious and concocted one and barred by limitation. The respondents indulged in falsification of accounts in making illegal claim against the estate of (late) Nanjundaiah. The statement of accounts of the Company for the last three years does not show any amount due from the estate of (late) Nanjundaiah, as claimed by the respondents. The shares of the Company have been fully paid without any calls and arrears and therefore the question of lien does not arise. Moreover, the Company has given dividends without however deducting any amount towards the dues as claimed by the Company. The balance sheet of the Company does not disclose any amount due from (late) Nanjundaiah in favour of the Company. Article 8 can be invoked exercising right of lien only in respect of unpaid shares and not for any outstanding amount due to the Company. There is no document showing any amount due from the estate of (late) Nanjundaiah in favour of the Company. The respondents will manipulate the records showing the arrears and therefore, the affairs of the Company must be investigated by the statutory auditor. The Company was paying rent till the month of March 2006 to the estate of (late) Nanjundaiah, as borne out by the rental receipt produced before the Bench. The respondents never made any claim against the estate of (late) Nanjundaiah at any prior point of time but made for the first time in the present proceedings. The claim is falsely made with a view to prevent the consenter to become a member of the Company and on the apprehension that the second respondent would be further reduced to a minority. In view of the falsification of records, the statutory auditor may be directed to conduct an investigation in the affairs of the Company for the last one and a half years and give a report on the purported claim made against the estate of (late) Nanjundaiah.
10. Sri Udaya Holla learned senior Counsel, submitted that the applicants have not made out any case to order an investigation in the affairs of the Company The allegations are bald and not supported by any material. There is, therefore, no need to order an investigation in the affairs of the Company The claim due from (late) Nanjundaiah remained unpaid during his life time and it remains unsettled, compelling the Company to exercise its right to lien over the shares of (late) Nanjundaiah. The respondents have made a counter claim in O.S. No. 10722 of 1993 before the City Civil Court, Bangalore against (late) Nanjundaiah and Dr. T.N. Raghunaih for the amounts due to the Company. The prayer for an investigation in the affairs of the Company is beyond the scope of The lis between the parties. There has been nor relief claimed in the company petition for ordering investigation in the affairs of the Company. When no final relief cannot be granted, the Bench will not grant the relief of investigation in the affairs of the Company at the interim stage Hence the application must be rejected.
11. Sri Udaya Holla learned senior Counsel, in support of the company application (C.A. No. 87 of 2006) submitted that this Bench by an order dated 01.05.2006, with a view to amicably settle the disputes between the shareholders, appointed M/s KPMG PEAT MARWICK to value the shares. However, the auditors expressed their inability to undertake the exercise of valuation of the shares of the Company. In this background, the order dated 01.05.2006 has to be modified by appointing any other independent auditor to value the shares of the Company. This exercise will not prejudice any of the shareholders including the petitioners and therefore, Sri Udaya Holla, learned senior Counsel sought for appropriate directions.
12. Sri B.C. Thiruvengadam, learned Counsel, while opposing the application (C.A. No. 87 of 2006) pointed out that the respondents, without keeping the petitioners informed, contacted M/s KPMG PEAT MARWICK directly and created an impression as if the auditors were required to value the property. The respondents are deliberately misleading the auditors with the sole intention of protracting the proceedings. The present application for appointing an alternative auditor does not arise, in view of the delaying tactics adopted by the respondents. The petitioners are not therefore interested in settlement at this stage. The application may be dismissed.
13. Sri Udaya Holla learned senior Counsel while arguing the company application (C.A. No. 88 of 2006) submitted that this Bench in the earlier company petition namely C.P. No. 32 of 2005 by an order dated 25.08.2005 directed the Company to defer holding of the annual general meeting which however came to be vacated with the passing of the order in the main petition on 02.03.2006. In the meanwhile, the earlier statutory auditors of the Company by their communication dated 21.09.2005 have indicated their unwillingness to continue as auditors of the Company. The Company has to file its returns for the financial year 2005-06 and the statutory auditors are not willing to undertake any work relating to the Company and therefore, the Company, must be permitted to appoint a statutory auditor to audit the accounts and file the returns for the year 2005-06.
14. Sri B.C. Thiruvengadam, learned senior Counsel, while opposing the company application (C.A. No. 88 of 2006) pointed out that the statutory auditors have indicated their unwillingness as early as in September 2005. but the respondents failed to take any action even after lapse of several months. The interim order dated 25.08.2005 deferring holding of the annual genera! meeting came to be vacated while passing the order in the main petition on 02.03.2006. Nevertheless, the respondents failed to hold the annual general meeting for the year ended 31.03.2005, and choose to file an appeal against the order of the Bench thereby committing default in not holding the annual general meeting. In these circumstances, an investigation may be ordered to verify the accounts of the Company by appointing a statutory auditor.
15. I have considered the arguments in all the applications. It is on record that this Bench by an order dated 25.08.2005 made in C.P. No. 32 of 2005 restrained the Company from convening and holding the annual general meeting, which however came to be vacated on 02.03.2006 with passing of the order in the main company petition (C.P. No. 32 of 2005). The order dated 02.03.2006 made in C.P. No. 32 of 2005 has been stayed by the Karnataka High Court in an appeal preferred by the respondents and the stay which is enforce is in relation to (i) transmission of 500 shares held by (late) Dr. Balarain in the name of the second petitioner; (ii) cancellation of the allotment of 750 shares made in favour of the second respondent; (iii) refund of the price of shares in favour of the Company paid by the second respondent and reduction of share capital; and (iv) rectification of the register of members of the Company consequent to the directions contained at sl. Nos. (i) & (ii) herein above. It is, therefore, clear that there is no impediment on the part of the Company to convene and hold the annual general meeting for the year ended 31.03.2005, as urged on behalf of the petitioners. The right of the...consenter to vote at the annual general meeting is not an issue in the company petition, as rightly pointed out by Sri Udaya Holla, learned senior Counsel and therefore, the interim relief sought by the applicants falls beyond the scope of the final relief. The Supreme Court categorically held in (a) Cotton Corporation of India Limited v. United Industrial Rank Ltd. and Ors. (supra) that if the final relief cannot be granted, in terms as prayed for, no interim relief in the same terms can be granted; (b) Ritona Comultaney Pvt. Ltd. and Ors. v. Lohia Jute Press and Others (supra) that no interlocutory order can be passed beyond the scope of the suit or against parties before the Court; and (c) State of U.P. and Ors. v. Visiteshwar (supra) that granting of final relief in the form of final relief is not warranted It may be observed that even if the reliefs are granted in terms as praved for in the Company by the petitioners, the relief of permitting the consenter to exercise her right as a shareholder would not arise. Hence, the prayer sought in favour of the consenter to exercise her right as a shareholder at the annual general meeting cannot be adjudicated in the interlocutory application.
The applicants, pursuant to the requisitions given by certain members belonging to Kincha group and Nanjundaiah group, are proposing to convene an extra ordinary general meeting for removal of the existing directors. The petitioners aggrieved on account of the purported acts of oppression and mismanagement at the instance of the respondents 2 & 3, being directors, have sought in the company petition to restrain the respondents 2 & 3 from participating in the affairs of the Company holding office of the directors of the Company. This will have to be adjudicated while considering the company petition on merits and therefore the question of removing the respondents 2 & 3 from the office of directors at this stage is not permissible. The practice of granting interim orders which would practically give the final relief sought for by the aggrieved shareholders has been disapproved by the Supreme Court in Bank of Maharashtra v. Race Shipping & Transport Co. Pvt. Ltd. and Anr. (supra).
The applicants are seeking to amend the company petition in order to include, inter alia, the claim in relation to (a) transmission of shares of (late) Nanjundaiah in favour of the consenter; (b) resistance of the claim of Rs. 82.47 lakhs made by the Company against the estate of (late) Nanjundaiah; (c) denying of the right of lien exercised by the Company in respect of the shares of (late) Nanjundaiah etc. It shall be borne in mind that the company petition is mainly based on the grievances of the petitioners in relation to (a) non-transmission of shares in the name of the second petitioner herein and her nominees; (b) allotment of 750 equity shares of Rs. 100/- each in favour of second respondent and (c) certain acts of mismanagement. The petitioners, on account of these acts of oppression and mismanagement in the affairs of the Company have claimed the following reliefs:
(i) to declare that the allotment of 750 equity shares of Rs. 100/- in favour of the second respondent is illegal and bad in law;
(ii) to order forfeiture of all shares standing in the name of the second respondent;
(iii) to order forfeiture of 1000 shares standing in the name of the third respondent;
(iv) to impose penalty of Rs. 25 lakhs each on the respondents 2 & 3; and
(v) to restrain the respondents 2 & 3 from participating in the affairs of the Company as directors of the Company.
It is, therefore, clear that the proposed amendments are entirely on a different cause of action. Moreover, the grievance on account of, non transmission of 280 shares of (late) Nanjundaiah in favour of the consenter has arisen after filing of the company petition and the reliefs which are sought by the applicants do not fall within the scope of the company petition. It has been held in Subhash Chand Agarwal and Anr. v. Associated Limestone Ltd. and Ors. (supra) that an amendment petition cannot be allowed to make out a fresh case, if the petitioner fails to make out a case in the original petition. In view of this, the prayer for amendment of the company petition is not permissible under law. It may be observed that "consent in writing" contemplated in Section 399(3) is a consent to the filing of a particular petition with particular allegations for particular reliefs under Section 397 or 398 or under both. The purported consent given by the consenter confines to the particular allegations made in the company petition, which do not include the allegations concerning non transmission of shares of (late) Nanjundaiah in favour of the consenter. The consenter is neither a party to the company petition. When no case has been made out for amendment of the pleadings, there is no scope for incorporation of several allegations arising out of the new cause of action. The prayer of the applicants to order an investigation in the affairs of the Company on account of falsification of the books of accounts of the Company and the disputed claim of Rs. 82,47 lakhs from the estate of (late) Nanjundaiah are beyond the scope of lis and in the absence of any such pleadings in the company petition, this Bench has no power to order an investigation in the affairs of the Company, as claimed by the applicants.
It is reported that KPMG PEAT MARWICK expressed their inability to undertake valuation exercise and therefore, the respondents are seeking to appoint an alternative valuer for the purpose of valuing the shares to explore the possibilities of any amicable settlement between the parties. In this connection, the petitioners have categorically stated that they are not interested in settlement of the disputes at this stage and therefore, there is no need for appointing any valuer for the present to value the shares of the Company, as sought by the respondents.
It is on record that the statutory auditors of the Company, by their communication dated 21.09.2005 have conveyed their unwillingness to continue as auditors of the Company. The Company has belatedely sought for appointment of a statutory auditor. Nevertheless, the Company shall ensure compliance with the statutory requirements in the interest of the Company and its shareholders. The Company, pursuant to the application made in C.A. No. 44 of 2006 by the petitioners has been permitted to convene the annual general meeting for the year ended 31.03.2005. In view of thus, the Company is at liberty to take appropriate steps for appointment of statutory auditor at the proposed annual general meeting. The transmission of 280 shares of (late) Nanjundaiah in favour of his wife namely, Honnamma Nanjundaiah cannot be considered in the interlocutory proceedings. Consequently, the consenter's right to exercise her right as a shareholder at the annual general meeting can neither be considered. Nevertheless, considering the fact that the Company is a closely held company and with a view to ensure the interest of legal heirs of the deceased Nanjundaiah. his wife with the authority which may be given by the remaining legal heirs of (late) Nanjundaiah. will exercise voting rights in respect of the shares held in the name of deceased Nanjundaiah. at the annual general meeting, without, however, prejudice to the contentions of the respondents in relation to the transmission of shares and recovery of the purported dues from the estate of (late) Nanjundaiah. Accordingly, while the applications in C.A. No. 44 of 2006 and C.A. No. 88 of 2006 are allowed, the rest of the applications are dismissed.