Company Law Board
Shiv Nath Rai Bajaj vs Nafabs India (P) Limited And Anr. on 24 September, 2001
Equivalent citations: [2002]108COMPCAS642(CLB)
ORDER A.K. Banerji, J.
1. Shiv Nath Rai Bajaj, the petitioner herein, has filed this petition under Section 397/398 of the Companies Act, 1956, (the Act) alleging acts of oppression and mismanagement against the respondents and seeking appropriate reliefs.
2. Briefly stated, the petitioner's case is that the petitioner and Heeralal Arora (second respondent) along with one Mr. Jaggi were the subscribers to the memorandum of association of the company, NAFADS India (P) Ltd. (first respondent) which was incorporated as a private limited company on 25.6.1982. The authorised capital of the said company was Rs. 25 lakhs and the paid up capital was Rs. 14,56,640. The petitioner held 98,824 shares and Shri Amarnath Jaggi, who was a nominee of the petitioner, held 22,501 shares, while the second respondent held 4,339 shares. Thus, the petitioner along with his nominee held 83.29% of the share-holding of the first respondent, whereas the second respondent namely, Heeralal Arora, held 16.71% of the equity share capital. The petitioner and second respondent were directors of the respondent company. Taking advantage of the absence of the petitioner who was a NRI settled at Bangkok, the second respondent, contrary to the provisions of the articles of association of the company and without notice, behind the back of the petitioner, allotted 20,000 shares of the face value of Rs. 10 each in favour of himself and his wife, Smt. Darshan Arora, and his son Sanjeev Kumar arora. Neither the wife nor the son was earlier a member of the company. Nor had their names been approved by the Board of directors. By the further issue of these shares, the majority share-holding of the petitioner has come down to 67.84%. Besides, the petitioner has been totally ousted from the management and control of the respondent company, and has been denied access to the company premises, account books and statutory records despite the fact that he was the Chairman of the Board of directors of the company. Mismanagement was evident from the fact that though the turnover of the company had increased, its losses have multiplied. Inspection of the accounts [and] of the records of the company and inspection taken in the office of RoC reveal that relevant returns have not been filed for several years. To resolve the difference, subsequently, an agreement/memorandum of understanding dated 2.4.1991 was arrived at between the petitioner and second respondent whereby the latter had agreed to pay a total consideration of Rs. 51,50,000 for purchasing the entire shareholding of the petitioner and his nominee, in five yearly instalments alongwith interest on the outstanding amount and till the completion of all payments, the petitioner was to continue as a shareholder director of the company and also entitled to appoint an alternate to act as director. The second respondent was entitled to appoint additional directors only as necessary for providing guarantees. The parties had also agreed not to increase the paid up capital. According to the petitioner, an amount of Rs. 25,000 was paid at the time of signing of the agreement, and in total, an amount of Rs. 23,43,750 only was paid in instalments, the balance amount of Rs. 30,31,250 has not been paid by the second respondent till date. Consequently, the petitioner continues to be a shareholder and a director of the respondent company. However, not only has he been ousted from the participation in the management of the respondent company, but was being denied even the basic rights of a shareholder. It is stated that after 2.4.1991, the petitioner has never received any notice of any general body meeting or the meeting of Board of directors, and the petitioner apprehends that all sorts of resolutions may have been passed without notice to him. On 3.12.1998 and 6.12.1998, the petitioner tried to take inspection of the account books and records, etc., though his power of attorney holder however, the same was denied Consequently, a case of oppression/mismanagement has bene made out and in the facts and circumstances, it would be just and equitable to wind up the respondent company unless the acts of oppression and mismanagement as complained of in the petition are not brought to an end. On these allegations, the petitioner has sought appropriate reliefs as set out in their prayer to the petition.
3. In the reply filed, the respondents have challenged the maintainability of the petition on the ground that the same was barred by limitation. Further, it was alleged that the petitioner, in terms of MoU, having received the entire consideration towards the price of his total shareholding including the shareholding of his nominee, has no locus standi to file the petition. It has been further stated that the petitioner was not interested in the affairs of the respondent company and wanted to sell his shares and also desired the personal guarantees given by him to be discharged so that he could withdraw from the company. The respondents not only paid the amount as per the MoU for purchasing his shares, but have also borrowed money from various sources so that the petitioner could be discharged from the guarantees given by him to the Indian Overseas Bank. For the same purpose, the respondent company had to increase its authorised share capital from Rs. 25 lakhs, and the paid up share capital to Rs. 25,36,640 since the same was specifically called for by the Haryana Financial Corporation (HFC) from which loans were taken for payment to the bank. It is alleged that these facts were within the knowledge of the petitioner as evident from the letter dated 21.5.1991 written to the bank by the respondent company signed by both the petitioner and the second respondent. The allegation regarding non-sending of notices of the general or the Board of directors meetings was denied, and it was asserted that notices were sent as per the requirements. So far as the inspection of the records and the accounts was concerned,it was stated that no such request had come to the respondent from the petitioner and neither the power of attorney in favour of the representative of the petitioner was made available to the respondents. There was no question of ousting the petitioner from the management, on the contrary, the petitioner himself had walked out and has filed this petition mala fide with ulterior motive.
4. Petitioner has filed a rejoinder reiterating the averments made in the petition and denying the allegation made in the reply filed by the respondents. It was denied that the full consideration for the shares was paid as per the MoU, and reiterated that the petitioner continues to remain a shareholder and a director. It was denied that the petitioner himself withdrew from the respondent company as alleged, and it was reiterated that he was ousted from the management by the respondents.
5. At the time of the hearing of the petition on 19.11.1999, on request of the petitioner, permission was given to file additional affidavit after taking inspection of documents filed by the company with RoC, as it was alleged that the said documents were filed only recently after notice of the petition. Thereafter, the petitioner filed an application (C.A. 116 of 2000) on 14.6.2000 stating inter alia that from the inspection of records in the office of the Registrar of Companies, it was found from the balance sheet for the year 1996 that the respondent had entered into an agreement with one M/s Capital Resorts (P) Ltd. For setting up a tourist resort on the factory land of the respondent company at Udyog Vihar, Gurgaon, for which it received Rs. 16 lakhs, and thereafter, the balance sheet of the company for the year 1997 shows that the said plot has been sold/transferred by the company to a third party. It was stated that no notice was ever given to the petitioner regarding sale/transfer of the land/building nor any notice or any meeting of the board or general meeting of the shareholdings was received by the petitioner where such resolution was passed. All these transactions were done behind the back of the petitioner with the motive of defrauding the company and the petitioner who is the majority shareholder. It was further stated that the respondents have shifted the plant and machinery to a new factory from where it is carrying on the business without giving any information to the petitioner.
6. In the reply to this application, respondents have inter alia stated that the property was sold after taking approval from the Board of directors and complying with the provisions of the Act as the company which was running at a loss had to make payments to the bank and HFC. The sale consideration received from the sale of the land, plant and machinery has been reflected in the books of accounts and has been paid in discharge of liability towards HFC and the Indian Overseas Bank. It was denied that the plaint and machinery has been shifted to any new premises which was acquired for the said purpose. It has been further stated that the plant and machinery had become junk and had been disposed of locally.
7. We have heard the learned counsel for the parties and have perused the record of the case. On behalf of the petitioner, it was strongly urged, firstly, that the present was a classic case where a majority shareholder and Chairman of the Board of directors has been ousted from the management of the company by minority shareholders. Further, the oppression was manifest from the facts that the second respondent allotted shares to his wife and son and additional shares to himself, behind the back of the petitioner without the approval of the Board of directors and contrary to the provisions of the articles, when the respondent company was in the nature of a quassi partnership. Support has been sought from the decision in the case of Pushpa Prabhudas Vora v. Voras Exclusive Tools (P) Ltd. (2000) 3 Comp LJ 271 (CLB) : 24 SCL 11 (CLB). Secondly, it has been contended that, assuming without admitting that any meeting of the Board or general meetings were held the respondents had deliberately tried to keep the petitioner in the dark by sending notices under UPC receipts at a Delhi address knowing fully well that the petitioner was residing at Bangkok. Seeking support from the decision in the case of Kamal K. Dutta v. Ruby General Hospital Limited (2000) 2 Comp LJ 289 (CLB) : 23 SCL 9 (CLB), it was contended that such notices, if issued to the petitioner for Board and other meetings, could not be considered as valid and binding; therefore, a case of oppression justifying grant of appropriate reliefs under Section 402 of the Act was made out. Lastly, it was contended that oppression in this case is established beyond doubt where the entire land, building, plant and machinery has been sold without notice to the petitioner who was the majority shareholder and a director of the company.
8. Learned counsel for the respondents, on the other hand, has contended that the petition is barred by limitation, or at any rate, by laches on the part of the petitioner, as the allegation, regarding allotment of further shares and ouster from the management pertains to the years 1988 and 1991 respectively. Secondly, the petitioner having been paid the full consideration for his shareholding, as per the MoU and the bank guarantee given by him on behalf of the company having been discharged by the respondents, the petitioner has no locus standi to file the present petition, and the same is not maintainable. So far as the selling of the assets of the company was concerned, the same was, as per the resolution passed by the Board of directors, notice for which meetings and all earlier meetings were duly sent to the petitioner at his recorded address, but not being interested, the petitioner had not attended the same despite knowledge, nor raised any objection prior to the filing of the present petition.
9. We have carefully considered the respective submissions made by the parties. As regards the question of limitation raised by the respondents for the delay in filing the petition, we are of the view that the same is not legally tenable atleast in the facts of the present case. It is noticed that the respondent company was a closely held private limited company where the parties were related. Some differences having arise, the petitioner and the second respondent who were the main shareholders had entered into a memorandum of understanding (MoU) dated 2.4.1991. It was agreed that the petitioner shall transfer his entire shareholding to the second respondent on receiving a consideration of Rs. 51,50,000 to be paid in five yearly instalments. It is admitted by the petitioner in paragraph 6 of the rejoinder that in pursuance of the said understanding, a total sum of Rs.23,43,750 has been received and a balance of Rs. 30,31,250 still remains to be paid. Along with the rejoinder, the petitioner has filed copies of the letters sent by the second respondent till the year 1994 promising to make the payment of the balance amount in instalments and expressing regrets for not complying with the payment schedule. Letter from the bank dated 24.10.1996 has also been filed by the petitioner to show that even till that date, the question of discharging the guarantee given by the petitioner to the said bank had not been sorted out by the second respondent as per the MoU. In such a situation and taking into consideration the close relationship of the parties, it was natural on the part of the petitioner not to rush and file the petition, specially when he was an NRI residing at Bangkok. That apart, it will be observed that one of the grounds raised by the petitioner alleging oppression is the fact that the respondents have sold the factory, land, plant and machinery behind the back of the petitioner, during the period 1998-1999. Taking this fact into consideration and further that the petition was filed on 20.4.1999, it cannot be said that the same was barred by limitation or latches on the part of the petitioner.
10. The respondents have submitted that the petition was not maintainable as the petitioner had no locus standi to file the petition after receiving the full consideration of the shares as fixed in the MoU dated 2.4.1991. We are not impressed with this submission for the reason, firstly, that the respondent company was not a party to the MoU which was only between the petitioner and the second respondent. Secondly, the respondents have failed to bring any document to our notice showing that the entire consideration for the transfer of the shares as mentioned in the MoU had been paid to the petitioner. On the contrary, even the balance sheet of the year ending March, 2000, filed by the respondents along with other documents as per our order dated 22.12.2000 discloses that the petitioner was shown as NRI shareholder even on that date. Prima facie, it is difficult to believe that the second respondent would not insist for transfer of the shares in his favour if the full consideration for the same had been paid to the petitioner and would permit the petitioner's name to be continued in the register of members of the respondent company. We, therefore, do not find any merit in this submission either.
11. On behalf of the petitioner, one of the main grounds raised alleging oppression is on account of the fact that additional shares were allotted to the second respondent as well as his wife and son behind the back of the petitioner, without notice to him and without any resolution being passed to that effect by the Board of directors. According to the petitioners, these allotments were made sometime in the year 1988. In the reply to the petition filed by the respondents, they have annexed as annexure R-1 copy of the minutes of a meeting of the Board of directors held on 21.5.1991 which was chaired by the petitioner. The minutes of the said meeting discloses that it was unanimously resolved to appoint Mr. Sanjeev Arora and Mrs. Darshan Arora (son and wife of the second respondent) as directors of the company and the second respondent was authorised to file the necessary papers in regard thereof with the Registrar of Companies. The petitioner in his rejoinder affidavit has not disputed the authenticity of these minutes. That apart, in the petition, it has bene admitted that the petitioner had attended meetings of the Board till 2.4.1991, and thereafter had not received any notices of the board meetings since the allotment of the shares were made in the year 1988, and the son and wife of the petitioner were appointed as directors on 21.5.1991, it can be presumed the petitioner has full knowledge of the same and had not objected to the issue of additional shares or the appointment of the said directors on the board. It is noteworthy that it is not the case of the petitioner that by the allotment of additional shares to the group of the second respondent, the petitioner has bene reduced to a minority. According to him, he still held 67% of the shares of the respondent company alongwith his nominee. The respondents were justifying the increase in the share capital of the company, as the company needed funds to discharge the loan of the bank and the HFC was insisting that the company increase its share capital. There is no effective reply to the same by the petitioner. It is well settled that increase in the share capital of the company, if the same is bona fide, required in the interest of the company cannot be considered to be an act of oppression even though the same might give some advantage to a particular group.
12. As regards the decision in the case of Pushpa P. Vora (2000) 3 Comp LJ 271 (CLB), the same will be of no help to the petitioner as in the said case the petitioners and the respondent had equality in shareholding, but by the issue of further shares, the petitioners were reduced to a minority. Such is not the case here. We are consequently of the view that the allotment of further shares to the second respondent, his wife and son will not amount to an act of oppression in the facts of the present case where the petitioner continued to remain a majority shareholder and raised no objection even after getting knowledge of the said allotment. Besides, increase of share capital, it cannot be doubted, was in the interest of the company, as loans were required to be taken to satisfy the dues of the bank and to discharge the guarantees given by the petitioner.
13. The petitioner has next contended that though he was the majority shareholder and one of the promoter directors of the company, he was ousted from the management by the second respondent, and has also been denied the basic rights of a shareholder. Though the respondents have denied the said allegation, they have not filed any documents like postal receipts, dispatch registers, etc., to show that notices of the Board meetings and the general meetings were being duly sent to the petitioner even after 2.4.1991 or that he had attended any meetings after 25.5.1991. Only in the reply filed to the application CA 116 of 2000 by which the petitioner was seeking some interim order that the respondents have filed photostat copies of UPCs showing that notices pertaining to the Board meetings dated 14.10.1996, 31.10.1996 and 5.11.1996 were sent to the petitioner. The said certificates show that they were addressed to the petitioner at an address at New Delhi. The fact that the petitioner was residing at Bangkok was not seriously disputed. As a matter of fact, the petitioner has filed copies of letters and fax messages from the second respondent to the petitioner addressed to him at Bangkok. Under the circumstances there appears to be substance in the contention of the petitioner that the said notices assuming that they were sent, were deliberately sent at an address of the petitioner at Delhi knowing fully well he was not residing there. In the case of Kamal K. Dutta (2000) 2 Comp LJ 289 (CLB), supra, it has been held that where notices have been issued to an address of the petitioner in India while the respondents would be aware that the petitioner resided in USA, the notice issued to the petitioner could not be considered to be valid notices and binding; therefore, a case of oppression, justifying grant of appropriate relief under Section 402 of the Act, was made out. Following the said decision, we are, therefore, of the view that a case of oppression against the petitioner has been made out in the facts of the present case as the respondent were not justified in sending notice regarding such important Board meetings as that of disposing of the factory, land, plant and machinery of the respondent company by sending notices to a place where the petitioner who was the majority shareholder was not residing and taking a decision in his absence regarding such a crucial matter.
14. Normally, after coming to these findings we could have allowed this petition and granted appropriate relief to the petitioner. However, we find that by doing so, we would only be passing an academic order, as the balance sheets of the relevant years filed by the respondent discloses that the factory, land, plant and machinery of the respondent company has already been sold out and the company is neither functioning, nor has it any fixed assets worth the name. The respondents have justified their actions on the ground that the company was running in losses, and that they had to discharge the loan obtained from the HFC and the Indian Overseas Bank. By our order dated 22.12.2000, we had directed the respondent to file copies of the balance sheet pertaining to the years 1989-90 and 1995 and 1998. The respondents have filed the balance sheets, the auditor's report and the director's report for the relevant periods as well the period upto 31.3.2000. From the audited balance sheet filed by the respondents, it would be evident that they have discharged the total outstanding of HFC as well as the Indian Overseas Bank to the extent of over Rs. 52 lakhs, and there are no liabilities remaining on the company as regards the secured loans. A certificate to that effect has been given by the bank and HFC which is a part of the documents filed by the respondents. As the factory, land, plant, and machinery of the respondent company have been sold, and as evident from the balance sheet that the payments have been made to discharge the liabilities of the company, it will serve no useful purpose in passing any orders in terms of Section 402 of the Act. That apart, it cannot be lost sight of that as against the claim of the respondents that they had paid full amount as per the MoU; on his own admission, the petitioner has received a sum of Rs. 23,43,750 from the respondents as part consideration for transfer of shares as per the MoU, when the investment of the petitioner in shares of the respondent company was about Rs. 9,88,240 only. As a matter of fact, we had also put to the company as it stood at present by buying out the shares of the second respondents group, but the petitioner was not prepared for the same, obviously, because there was nothing left in the respondent company.
15. In view of the above position, we are not inclined to exercise our equitable jurisdiction and to grant any of the prayers sought by the petitioner. However, as the respondent company has not been dissolved or wound up, therefore, we direct the respondents to send all notices of the Board and the general body meetings to the petitioner by registered post atleast three weeks before the said meetings at both the addresses of the petitioner at Delhi and Bangkok. The petition accordingly, stands disposed of. Cost on parties.