Company Law Board
S.B.P. Anand Mohan vs Graphic Impressions (Madras) Ltd. on 9 August, 2002
Equivalent citations: [2004]120COMPCAS265(CLB), [2003]41SCL166(CLB)
ORDER
K.K. Balu, Member
1. The petitioner holding 14.83 per cent of the issued and paid-up capital in M/s. Graphic Impressions (Madras) Limited ('the Company') has filed this petition under Section 397/398 of the Companies Act, 1956 ('the Act') alleging acts of oppression and mismanagement in the affairs of the Company.
2. The main acts of alleged oppression and mismanagement relate to exclusion of the petitioner from the affairs and management of the Company, diversion of business and funds of the Company, manipulation of the expenses incurred by the Company, unauthorized sale of the assets of the Company, unlawful writing off huge debts of the company and misappropriation of funds.
3. Shri Krishna Srinivasan, Advocate appearing for the petitioner, while initiating his arguments submitted that initially the printing business was carried on by the respondents 2 and 3 as a partnership concern, wherein the petitioner was subsequently inducted as a partner in April 1986, all the three being equal partners and the petitioner being a qualified technical partner. With the growth of business, the partnership was converted into a private limited company in May 1993, which subsequently became a public limited company in March 1995 with the capital of Rs. 1.27 crores. The petitioner was the whole-time director up to 1996 and was taking care of production. During the year 1996, the Company made a profit of Rs. 20 lakhs and had an accumulated reserve of Rs. 37 lakhs for the year ended 31-3-1996. At this stage, the respondents had diverted the business of the Company to their own partnership concerns, which used to give job work to the Company adversely affecting the profit position of the Company. The second respondent has started yet another similar business in the premises of the Company with his family members utilizing the entire infrastructure of the Company amounting to unfair prejudice of the shareholders and entitling the petitioner to obtain appropriate relief. In this connection, he relied on London School of Electronics Ltd., Re 1985 BCLC 273 and Stewarts (Brixton) Ltd., Re BCLC 4, 8 (ChD) to show that the diversion of a business opportunity from the company to another company controlled by a director holding majority shares of the first company is oppressive. In the meanwhile, the respondents prevented the petitioner from carrying on his functions and started excluding him from the affairs of the Company. Consequently, the petitioner stopped working as a whole-time director. The respondents had incurred huge liability by borrowing from Global Trust Bank, which is totally unnecessary. The respondents had disposed the assets of the Company for a loss. The Company had to incur a loss of Rs. 95 lakhs in the year 1999-2000 on account of the mismanagement by respondents 2 to 4. The respondents inflated consumption of raw materials at more than 90 per cent and manipulated the expenditure, which has gone as high as 158 per cent. In the process, the respondents diverted profits of over Rs. 48 lakhs to themselves. The annual general meeting of the Company for the year 1999 was held in September 1999. Annual general meeting for the year 2000 was conducted after 20 months. The respondents have not chosen to finalise the accounts for the year 2001 violating the provisions of Section 166 of the Act. The respondents' mismanagement resulted in non-performing assets of over Rs. 90 lakhs. The respondents have deliberately mismanaged the Company and siphoned off the funds to their own private enterprises. Shri Krishna Srinivasan while concluding his arguments, pointed out that the affairs of the Company are being conducted continuously in a manner prejudicial to the interest of the Company and oppressive to the members and sought for the reliefs made in the petition, in support of which he relied on Chander Krishan Gupta v. Pannalal Girdhari Lal (P.) Ltd, [1984] 55 Comp. Cas, 702, Col Kuldip Singh Dhillon v. Paragaon Utility Financiers (P.) Ltd. [1988] 64 Comp. Cas. 19.
4. Shri Arvind P. Datar, Senior Advocate appearing for the respondents, while refuting the charges of mismanagement and misappropriation levelled against the respondents has submitted that the petitioner did not evince any interest whatsoever in the affairs of the Company. He pointed out that the petitioner had availed a loan of Rs. 12.50 lakhs from Mr. Bijal Patel towards his share capital in the Company through personal contact of the second respondent. The said loan was guaranteed by the second respondent. The petitioner never bothered to repay the said loan, which was ultimately cleared by the second respondent. The wife of second respondent has lent Rs. 38 lakhs to the petitioner. No interest is paid to her. The petitioner, therefore, has no locus standi to question the acts of respondents. According to Shri Datar, even though the petitioner continues to be a director of the Company he never participates in the management and affairs of the Company. He further pointed out that the petitioner himself had started his own printing business in 1986-87, without the knowledge of the respondents, which incurred a huge loss and has bank liability of Rs. 20 lakhs. According to Shri Datar, the petitioner sought the assistance of the respondents to bail him out from the financial difficulties resulted on account of his private business, which was declined by the respondents resulting in filing of this petition. Shri Datar justified the borrowal from Global Trust Bank as well as the sale of land by the Company, by which the petitioner has never been aggrieved. Shri Datar pointed out that the Company was facing declining sales from 1998 onwards due to recessionary trends as well as shifting of clientele to other medias. The machinery belonging to the Company is rather old and the print quality is not up to the mark, which resulted in poor business of the company. The Company could not generate sufficient cash flows and liabilities mounted. Shri Datar pointed out that the loss is on account of imposition of sales tax; the sale as waste paper of semi-finished products accumulated over a period of years and bad debts to the tune of several lakhs. He further pointed out that the Company removed the old papers from the stock and sold them at a market price by the Company, which resulted in reduction of closing stocks by about Rs. 40 lakhs. This is the reason for the figures showing increased raw materials consumption. These factors are beyond the control of the respondents resulting in losses. In the circumstances, the respondents started giving job works to the Company through the private units at higher rates. Consequently, the Company which had to run 2 to 3 shifts every day, could survive on job working and repaid Rs. 137 lakhs in favour of the bankers and SIDBI. He, therefore, urged that there are no acts of oppression and mismanagement on the part of respondents. He further pointed out that the petitioner has not given the proof of acts of oppression and siphoning off funds by the respondents, without which such allegations cannot be sustained. In this connection, he relied on
(i) Ravi Shankar Taneja v. Motherson Triplex Tools (P.) Ltd. [2001] 4 CLJ 102 (CLB) - To show that in case of allegations of mismanagement, siphoning off of funds without giving any particulars or details, no adjudication on these issues is possible on the basis of suspicion and surmises;
(ii) Allianz Securities Ltd. v. Regal Industries Ltd. [2001] 4 CLJ 314 (CLB) to show that the allegation of diversion and siphoning off funds for personal use without particulars substantiating such allegations cannot be taken cognizance by the CLB; and
(iii) Jaladhar Chakraborty v. Power Tools & Appliances Co. Ltd. [1994] 79 Comp. Cas. 505 - to show that the acts of oppression must not only be alleged with sufficient particulars, but they must also be proved to the satisfaction of the Court.
Pointing out the conduct of the petitioner, Shri Datar submitted that the petitioner could not seek any remedy against the petitioners, in support of which he relied on :
(iv) Desein (P.) Ltd. v. Elcctriom India Ltd. [2001] 3 CLJ 459 (CLB)
(v) Anand Kumar Saigal v. Manu Properties (P.) Ltd. [2001J 3 CLJ 425 (CLB) and
(vi) Ajit Singh v. DSS Enterprise [2001] 4 CLJ 421 (CLB)- to show that the conduct of the parties is an important aspect in moulding relief by the CLB.
5. Shri Datar while concluding his submission submitted that in case the petitioner is asked by the CLB to get out of the Company and shares are valued, the CLB may take into account the interest payable to the relatives of the directors who have given loan to the petitioner and also the loan amount guaranteed and paid by the second respondent enabling the petitioner to subscribe to his share capital of the Company.
6. We have considered the pleadings and arguments of the Counsel. The main grievances of the petitioner are that being a director of the Company he has been excluded from the management and the affairs of the Company since 1996; that the respondent have diverted the business of the Company to their own partnership concerns; that the respondents have incurred huge unnecessary liabilities; that they have disposed of assets of the Company which is already incurring losses and that they have inflated the consumption of raw-materials and manipulated expenses. The petitioner on his own admits that he had been excluded from the management from 1996 onwards. There is nothing on record to show that at any point of time, he had attempted to enforce his rights as a director for this long period. More so, when he claims himself to be the only technically competent person. Therefore, as far as allegation that he has been excluded from the management cannot be considered at this belated time. In respect of other acts of mismanagement like diversion of funds, manipulation of expenses, unauthorized sale of asset etc. as alleged by him have not been substantiated, without which we are not inclined to grant any relief, as has been upheld by the Courts in the cases cited supra. However, considering the facts of this case that the petitioner was one of the partners of the firm, which was later, converted into a Company, on equitable consideration we should grant him appropriate relief. Such relief in the facts and circumstances of the case is that the respondent/ the Company should purchase the shares held by him on a fair consideration. Since the Company had incurred losses and since the petitioner has not been associated with the affairs of the Company as per his own admission, we consider it appropriate that the shares of the petitioner should be purchased at par either by the Company or the respondents. During the course of hearing, it was urged by the learned Senior Counsel for the respondents that the amount of Rs. 12.50 lakhs invested by the petitioner was taken as loan by him from M/s. Chittamoor Holdings and Finance (P.) Ltd. (Rs. 10 lakhs) and M/s. Chottabhai and Company (Rs. 2.50 lakhs) with the guarantee given by the second respondent and since the petitioner had failed to repay the same, the second respondent had to refund the amount. In other words, according to the learned Senior Counsel for the respondents, the petitioner has not invested any money on his own for the shares allotted to him and as such even the order to purchase his shares were to be issued, nothing would be payable to him. Normally, when the name of a person is on the register of members and shares have been allotted to him, we would not go into as to the source of investment. However, since the respondents had produced an affidavit from Shri Bijal K. Patel, who is purported to have arranged the loans through M/s. Chittamoor Holdings and Finance (P.) Ltd. and M/s. Chottabhai and Company to the petitioner for subscribing to the shares, which was later repaid by the second respondent, we gave the opportunity to the petitioner to rebut the same. The petitioner has now produced two letters dated 21-6-2002 and 10-7-2002 from M/s. Chittamoor Holdings and Finance (P.) Ltd. The letter dated 21-6-2002 shows that loans were taken by the petitioner and respondents 2 and 3 during June 1995 from M/s. Chittamoor Holdings and Finance (P.) Ltd. These loans were settled by them during the financial year 1996-97. It further confirms that these loans were given only against promissory notes and not guaranteed by anyone. In the reply affidavit to these letters, the respondent has pointed that inspite of directions given by this Bench, the petitioner has not produced his bank statements to evidence the repayment of the loan by himself. The letter given by M/s. Chittamoor Holdings and Finance (P.) Ltd. only indicates that the loan taken by the petitioner had been refunded without indicating as to how and by whom this amount was repaid. Therefore, no reliance should be placed by this letter.
7. In this petition, what we arc concerned is the affairs of the Company and the relationship between the shareholders and the Company. It is on record that the petitioner had subscribed to the shares issued to him and his name is in the register of members in respect of these shares. The issue relating to as to how and in what manner the petitioner mobilized funds for investment in the shares and whether the loan borrowed by him was repaid by the respondent etc. arc irrelevant as far as these proceedings arc concerned. Since we had already directed in para 6 of this order that the shares of the petitioners should be purchased at par either by the Company or the respondents, the investment made by the petitioner for these shares should be paid by the purchaser of these shares at par. As far as the claim of the respondent that he had repaid the loan taken by the petitioner is concerned, he may initiate appropriate proceedings if so advised in this matter. In case the Company purchases the shares, it is authorized to reduce the share capital of the Company to the extent of face value of the shares. The consideration for the shares should be paid on or before 31-12-2002. In case the shares certificates had been delivered to the petitioner, he will hand over the same along with the blank transfer forms to the purchaser of these shares at the time of receiving the consideration.
8. With the above direction, we dispose of this petition with no order as to cost.