Company Law Board
D. Suryanarayana Shastri, D. Ram Mohan ... vs Dasika Industrial Chemicals Private ... on 22 May, 2002
ORDER
K.K. Balu, Member
1. The petitioners holding more than one-tenth of the paid-up capital in M/s Dasika Industrial Chemicals Private Limited ("the Company") as well as constituting one-tenth of the total number of members of the Company have filed this petition under Section 397/398 of the Companies Act. 1956 alleging acts of oppression and mismanagement in the affairs of the Company. The main acts of oppression and mismanagement relate to manipulation of the accounts, non-holding of board meetings, annual general meetings, non-submission of accounts of the Company, illegal induction of respondents 3 to 5 as directors of the Company, illegal allotment of the impugned shares in favour of respondents 2 to 4, falsification of statutory returns, manipulation of minutes of the board meetings etc.
2. Shri R. Venkatavaradan, Advocate appearing for the petitioners while initiating his arguments has submitted that the Company was incorporated in August, 1987 by the family members of the first petitioner with the main object of carrying oh the business of manufacturing chemicals. The first petitioner is the father and the petitioners 2 & 3 and the second respondent are his sons. The fourth petitioner is the wife of first petitioner. The third respondent is the wife of second respondent. The first petitioner and the second respondent are the subscribers to the memorandum of association of the Company. The petitioners 1 to 3 and the second respondent are the life-time directors of the Company. The second petitioner originally was in service with Vysya Bank when the Company was incorporated, who had resigned from the job and joined the Company as General Manager. The day-to-day affairs of manufacturing process were taken care by the petitioners 1 & 2. The second respondent was initially the Managing Director of the Company, who was inter-alia in-charge of finance, maintaining the accounts of the Company and looking after the marketing, recovery of dues, liaison with the government departments etc. The second respondent started manipulating the accounts to enrich himself and failed to make payments to raw-material suppliers. The second respondent failed to render proper accounts to the petitioners including the amounts settled to the banks and financial institutions, in spite of the repeated demands made by the petitioners, on account of which the disputes arose between the petitioners and second respondent, which were resolved by the efforts and mediation effected by Shri J. Radha Krishna, Chartered Accountant and accordingly a memorandum dated 12.07.1998 (Page 27 of List of Annexures to Petition) was entered between the petitioners and the second respondent.' Nevertheless, the second respondent failed to act in terms of the memorandum dated 12.07.1998. The second-respondent-never conducted the board meetings after March, 1998. Even otherwise, the petitioners 1 & 2 were denied entry to the registered office for attending the board meeting.' They were denied of looking into the books of accounts and other records of the Company, which compelled the petitioners to approach Registrar of Companies to inspect the records of the Company. It transpired that the second respondent illegally inducted the respondents 3 to 5 as directors of the Company and illegally allotted the impugned shares in their favour. The petitioners desired that these issues shall be discussed at the annual general meeting of the Company as the second respondent failed to convene the AGM. The first petitioner convened the annual general body meeting on 22.09.1999, wherein the shareholders present at the meeting by an unanimous resolution removed the second respondent as the Managing Director of the Company and appointed the second and fourth petitioners as the directors of the Company. At the board meeting held on 25.09.1999, the first petitioner was unanimously elected as the Managing Director of the Company. Later, the second respondent attempted to enter into the premises for taking away the raw-materials and finished goods, which compelled the first petitioner to file a civil suit in O.S. No.39/2000 on the file of the Principal Junior Civil Judge at Palakol praying for a permanent injunction restraining the second respondent from interfering with the first petitioner's peaceful possession and enjoyment of the factory premises of the Company, which was ultimately dismissed. The second respondent had manipulated form-2 for return of allotments said to have been made on 11.06.1998 to the tune of 7,899 shares, out of which 4,899 shares were alleged to have been allotted to the second respondent, 2,750 shares in favour of the third respondent and 250 shares in favour of the fourth respondent. According to Shri Venkatavaradan, no board meeting was held on 11.06.1998 allotting the impugned scares in favour of the respondents. He further pointed out that the authorized capital as on.10.6.1998 of the Company was only Rs.25 lakhs. As at 11.6.1998, the issued and paid-up capital of the Company was Rs. 17,10,100/-, in view of which the impugned shares of Rs.100/- each could not have been legally allotted is the said issue is beyond the authorized capital of the Company. The second respondent had been manipulating the accounts so as to divert the funds of the Company to his personal use. The second respondent withdrew huge sums allegedly to be paid to the financial institutions, but no payment was made for clearing the dues of the Company. He further pointed out that the second respondent had manipulated the entire minutes book to show as if various meetings were held on different dates and in this connection, he specifically drew our attention to the minutes of the meeting of the Board of Directors held on 3.3.1988 and 7.8.1999, wherein the petitioners 2 & 3 and 1 respectively had allegedly resigned from the Board of Directors of the Company. He further took pains to draw our attention to the various irregularities in the records maintained by the Company. The minutes of the board meeting said to have been held on 07.08.1999, at page 84 of the petition, show that the meeting was held at 10.00 a.m. But the notice dated 3.8.1999 (at page 30 of the petition) for the said board meeting shows that the board meeting would be conducted on 07.08.1999 at 3.00 p.m. At page 88 of the minutes, it is recorded that the first petitioner has submitted a letter of resignation from the board which was considered and approved by the board. However, the respondents did not produce any letter of resignation said to have been executed by the first petitioner. The letter dated 12.08.1999 (Annexure A-6) sent by the Company to the second petitioner endorsing a copy in favour of the first petitioner shows", that the first petitioner continues to be a director of the Company. The minutes of the board meeting (at page 80 of index of documents produced by the petitioner) held on 3.3.1988 shows that the second petitioner had resigned from the board. The date-arid the time in the minutes are found to be corrected and the first page of the minutes at page 80 shows that the meeting was closed with vote of thanks. The subsequent pages, namely 81 & 82 show that certain other matters have been discussed and resolutions have been passed. Again, it was recorded at page 82 that the meeting was concluded with vote of thanks. These manipulations will establish that the minutes are concocted and that the resignation of the second petitioner is not legally correct. Though the minutes of the board meeting (Annexure R-17) said to have been held on 11.06.1998 show that the impugned shares were allotted to the respondents 2 to 4, no board meeting was actually held on that date and that the petitioner did not attend the board meeting on 11.06.1998. The letter dated 27.09.2001 (Annexure A-7) addressed by the fourth respondent clearly establishes the fact that he was not allotted any share on 11.06.1998 by the board of directors of the Company. The annual return at page 104 of index of documents produced by the second respondent as at 26.09.1998 and the annual return as at 14.09.1999 at page 116 of index of documents do not reflect the allotment of impugned shares in favour of the respondents. The balance sheet for the year ended 31.3.1998 at page 260 of index of documents filed by the second respondent shows that a sum of Rs.20 lakhs was available by way of share application money. However, the Board of Directors allotted the impugned shares to the tune of Rs.7,89,900/- only in favour of the respondents. The annual return as at 26.09.98 at page 104 of volume 2 of index of documents filed by second respondent does not indicate the allotment of impugned shares in favour of the respondents (page 14). The letter dated 26.03.2001 (Annexure R-42) addressed to the Company by one of its constituents would reveal the fact that the funds of the Company were diverted by the second respondent to one M/s Dasika Butane Agencies, controlled by him. The photocopy of the notice dated 3.7.1998 calling for extraordinary general meeting of the Company produced, by the petitioner is in variation with the original notice produced by the respondents. In the original notice produced by the respondents describe the petitioners 2 & 3 as ex-directors, which, according to the petitioners is fabricated by the respondents. It is in these circumstances, Shri Venkatavaradhan emphatically submitted that an auditor may be appointed to verify the records and books of accounts of the Company which will substantiate the plea of the petitioners.
3. Shri Venkatavaradan, in support of his legal submissions, has relied upon the following decisions:
(i) In re Hindustan CO-op. Insurance Society Ltd., -- AIR 1961 Calcutta 443 to show that "the remedy under Section 397 is not limited to cases where the company is still in active business. The object of the remedy is to bring an end the matters complained of, i.e., "oppression", which can be done even though the business of the Company has been brought to a stand still."
(ii) K. Narain Das v. Bristal Grill (P) Ltd. and Ors., -- (1997) 3 Comp LJ 321 (CLB) to show that in case any payment was found to be not for the purpose of the business of the Company, the concerned directors of the Company can be made personally responsible for making good the payment.
4. Shri Venkataraman, Counsel appearing for the second respondent while denying the allegations of acts of oppression and mismanagement and misappropriation of funds of the Company by the second respondent has invited our attention to the return of allotments dated 1l.06.1998 (at page 38 of Volume I of Index of documents) disclosing the allotment of impugned shares in favour of the respondents. He further referred to the notice dated 3.7.1998 (Annexure R-69) calling for the extraordinary general meeting of the Company which shows that the Company was constrained to incur a loss of Rs. 4,00,000/- per month at the existing sale price of Barium Carbonate and Sodium Sulphide, leading to convening the meeting of members of the Company. The MOU dated 12.07.1998 (Page 27 of List of Annexures to petition) entered between the petitioners 1, 2 & 3 and respondent 2 would indicate that the outstanding disputes were amicably resolved among the family members. Pursuant to the said MOU, the second respondent had pumped Rs.18 lakhs by closing the liabilities of the Company due to the bank and financial institutions. Clause 7 of the MOU shows the amount due and payable to the second respondent. Clause 9 confirms the allotment of the impugned shares and the shareholding pattern between the petitioners 1 & 2 and respondents 2 & 3. He further pointed out that the first petitioner was signing all the balance sheets all these years and therefore estopped to question the correctness of the accounts drafted and approved by the board of directors of the Company including the first petitioner. In this connection, he invited our attention to findings of Civil Court in IA No.151/2000 in O.S. . No.39/2000 to show that the second respondent did not commit any act of oppression and mismanagement. The Civil Court after hearing the elaborate arguments advanced by the parties has dismissed the application on merits. The order of the Civil Court was ultimately upheld by the High Court by its order dated 20.07.2001 made in Civil Revision Petition No.2813 of 2001. He further, pointed out that the notice dated 31.08.1989, at page 36 of Index of Documents filed by the petitioners, given by the first petitioner calling for annual general meeting of members of the Company is not in accordance with the law especially when a single director, cannot convene the annual general meeting of a company, The meeting so convened is not valid under law. The telegram sent by the petitioners 1 & 2 as at Annexure R-79 reveals that the board of directors conducted the board meeting on 07.08.1999 and that the Managing Director refused to show the minutes book of the board of directors. This, according to the respondent, disproves the case of the petitioners that no board meeting was conducted on 07.08.1999. The complaint dated 10.09.1999 (at page of Index of Documents filed by the petitioners) by some of the members before the Registrar of Companies also establishes the fact that the board meeting was conducted by the Company on 07.08.1999. The order dated 14.10.1999 of the High Court of Andhra Pradesh (Annexure R-32), passed ,in Writ Petition preferred by the second respondent against the Electricity Board for supply of energy to the Company's unit establishes the fact that he was taking every initiative to run the Company protecting the interest of its members and also the fact that the second respondent had deposited Rs. 11 lakhs towards the electricity deposit as evidenced by the letter dated 24.02.1999 issued by Transmission Corporation of Andhra Pradesh Limited. The letter dated 26.03.2001 at page 53 of Index of Documents filed by the respondents addressed by one of the debtors to the Company shows that the second respondent was taking steps to recover the outstanding amount due to the Company. The letter dated 7.12.1998 (Annexure A-3) sent by the Company's bankers shows that the document has been procured by the petitioners from the bank surreptitiously. Shri Venkataraman has categorically submitted that the petitioners never contributed any money towards the capital of the Company and that the third petitioner failed to give bank guarantee in favour of AP Small Scale Industrial Development Corporation Limited as borne by Annexure-27 and that the petitioners have failed to make out any case against the respondents. There has been no act of oppression and mismanagement in the affairs of the Company. The respondents are willing to sell their shares to the petitioners, who should pay the capital invested by the respondents and all the investments and payments made by the respondents pursuant to the MOU made between the parties and also the electricity deposit amount. He further submitted that the Bench may consider the facts that the unit is at present closed and that the machineries have become a scrap and also the sales tax dues and dues to the suppliers before arriving at the valuation of the shares. In the alternative, the respondents are willing to purchase the shares of the petitioners at par value and accordingly the respondents will go by the order of this Bench. It is in these circumstances, Shri Venkataraman prayed that the petitioners are not entitled to any of the reliefs made out in the petition. He accordingly sought for dismissal of the petition.
5. We have considered the pleadings and arguments of both the Counsel. The main acts of oppression and mismanagement relate to the illegal allotment of the impugned shares, manipulation of accounts, non-holding of statutory meetings, illegal induction of respondents 3 to 5 as directors of the Company. It is, on record that these disputes were resolved by the efforts and mediation effected by one Shri J. Radha Krishna, Chartered Accountant which resulted in entering into a Memorandum of Understanding dated 12.07.1998 (Page 27 of List of Annexures to Petition) between the parties. Admittedly these acts of oppression and mismanagement were raised in the Civil Suit filed by the first petitioner in O.S. No.39/2000 on the file of the Principal Junior Civil Judge at Palakol, which ended in dismissal of the suit and later confirmed by the High Court. Though the remedy claimed in the Civil Suit is different, yet all the allegations substantially raised before the CLB were agitated in the Civil Suit. It is apparent that after having failed before the Civil Courts and High Court, the petitioners have filed the present petition alleging the same acts of oppression and mismanagement. In regard to the allotment of the impugned shares in favour of the respondents, it is observed from the return of allotment dated 11.06.1998 (page 38 of Volume 1 of Index of documents) filed by the respondents that the impugned shares were allotted on 11.06.1998. Clause 9 of the MOU dated 12.07.1998 confirms the allotment of the impugned shares and the shareholding between the petitioners 1 & 2 and respondents 2 & 3. The Return of Allotment dated 11.06.1998 (Annexure R-18) filed on 16.06.1998 and the Annual Return as at 14.09.1999 filed on 21.02.2000 with the Register of Companies, Andhra Pradesh show that the impugned shares were allotted in favour of the respondents 2 to 4, Though the minutes, of the various board meetings do contain correction and over-writings, there is no force in the plea of the petitioners in the light of the settlement of disputes and the consequent MOU dated 12.07.1998, which was acted upon by the parties, though not in full. Though with the allotment of the impugned shares, the paid-up capital is found to be in excess of the authorized capital, we do not propose to set aside the allotment on this account alone. Though, it is a irregularity, it is found to be in the interest of the Company, especially when the respondents admittedly have settled the dues of the company's bankers and financial institutions as borne out by the MOU dated 12,07.1998; Though the allotment is irregular, we find that it is hot oppressive in nature, but it is in the interest of the Company. The rest of the allegations of the petitioners relating to manipulation of accounts, non-holding of board meetings and annual general meetings etc. are all after thought, especially the said disputes were settled by virtue of the MOU dated 12.07.1998 which enabes the parties to take up with the mediator in case of any dispute among parties. There is nothing oh record that the petitioners have approached the mediator in regard to these allegations. In view of the MOD dated 12.07.1998, we do not find any substance in reagitating the same disputes and no purpose would be served in view of the fact that the Company has already been closed as early as in March, 1999. Moreover, the second respondent has made an offer either to purchase the shares of the petitioners at par or to sell his shareholdings provided the petitioners settle the investments made by the second respondent. In the circumstances, the petitioners are at liberty to exercise either of the options by 31.07.2002 and the option exercised by the petitioners will be binding on the respondents. In case they exercise the option of selling their shares, the 2nd respondent will pay consideration for the shares at par within a month of receipt of notice from the petitioners. Likewise, in case the petitioners desire to purchase the shares of the respondents, they must pay back all the investments made by the respondents, within a month of issuing a such a notice.
6. With the above directions, the petition stands disposed of.