Company Law Board
M.L. Arora vs Green Vallay Frozed Food Ltd. And Ors. on 1 November, 2007
Equivalent citations: (2008)215CTR(NULL)320
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 124 of 2006 filed by Sh. M.L. Arora (the petitioner) under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as the "Act") against Green Valley Frozen Food Ltd. & Ors (the respondents) alleging (a) illegal/fraudulent transfer of Petitioner's share holding; (b) illegal/fraudulent removal of petitioner as director; and (c) illegal/fraudulent adjustment of unsecured loan.
2. The undisputed facts of the case are: Green Valley Frozen Food Ltd. & Ors, R-1 was incorporated on 20th April 2000 having its registered office at 14, Industrial Area, Kala Amb, District Sirmor, Himachal Pradesh. The authorised capital of the company is Rs. 2,00,00,000/- divided into 20,00,000 equity shares of Rs. 10/-each. Subscribed and paid up share capital of the company as on 30.9.2004 is Rs. 1,00,00,000 (Rs. One crore only) divided into 10,00,000 equity shares of Rs. 10/- each of which ordinary shares of Rs. 10/- each were issued as fully paid up. The main objects of the company are (a) to carry on all or any of the business of processors, growers, exporters, buyers, sellers, agents, merchants and dealers in all kind of fresh and processed mushrooms, canned mushrooms, frozen mushrooms, dry freezed mushrooms, and vegetable, fruits, vegetables, flowers, herbs and forest products and their stems, roots, leaves and seed and their various products and by-products like squashes, concentrates, juices, ready beverages, etc. The company was jointly promoted by R-2 & 3 with Mitruka family having representation of two directors each on the Board. The company approached Banks and Financial Institutions for credit facilities which could not be sanctioned due to the lack of adequate financial and technical credentials of Mitruka and family. During December 2000, Mitruka and family accordingly offered to sell their shareholding to the petitioner, R-4 and 5. The petitioner was appointed as Consultant of the company on April 20,2000. On December 11,2000 he became a shareholder and director and gradually acquired 20% of the equity of the company till 30.9.2002 like other directors. The petitioner was appointed as Managing Director on April 1, 2002. The petitioner further purchased 25,000 equity shares each from R-2 and 3 and thereby holding 2,50,000 equity shares being 25% of the paid up equity share capital before the impugned transfer of shares on 27.9.2003.
The Board of Directors of the company was also reconstituted with the resignation of representatives of Mitruka family and the appointment of the petitioner, R-4 and 5 as directors. The company then applied for term loan to the Indian Bank Chandani Chowk, New Delhi for setting up the project of Frozen Food Plant at Kala Amb in H.P. with a cost of Rs. 468 lacs. The Bank sanctioned a loan of Rs. 240 lacs and a cash credit limits of Rs. 50 lacs.
The project was funded as follows: Rs. (in lacs) 1. Equity 100 2. Unsecured Loan 53 (Approx) 3. Bank Loan 240 4. Grant from Govt. of India Ministry of food processing 75 Total 468 (Approx.)
The company became operational and put up a plant for frozen foods, which came in production in the year 2001-2002. There was a stipulation in the loan agreement that the petitioner alongwith the R-2 to 5 were not to sell their shares and further not to withdraw the unsecured loans till the pendency of the term loan. There was a further stipulation that the constitution of the Board of Directors shall remain unchanged until the loan is repaid and unless the consent of the Bank is obtained. On April 1, 2003 the R-2 to 5 suddenly resigned from the directorship of the R-1 and a few days later i.e. on April 11, 2003 transferred their entire shareholding to Mr. Anand and family without the consent of the Bankers.
3. Sh. Virender Ganda, Counsel for the petitioner pointed out that on and around early 2003 all the Shareholders decided to exit from the business and, accordingly, everyone was authorised to look for a prospective buyer. Each of the groups signed and executed the Share transfer deed(s), resignations as Director(s) and other related documents and handed over the same to each other, only to reinforce the already existing mutual trust.
4. The Petitioners' case is that on representation of the Respondents, he had agreed to sell his shareholding for a consideration of Rs. 50 Lacs, he signed the letter of resignation from Directorship and the share transfer deeds in respect of his shareholding; on 27.09.2003, the Petitioner's shareholding was transferred to Respondent No. 7; the original share certificates are still with the Petitioner; the transfer of shareholding of the Petitioner in the name of Respondent No. 7 is malafide, unfair and illegal the Petitioner has not received full consideration; the Petitioner's unsecured loan has not been paid; he has not received any notice of Board meeting. General Meeting. Hence his prayer for restoring him as Director with retrospective effect and declare the transfer of his 2.5 Lac shares as illegal and bad in law. Investigation into the affairs of the Respondent Company has also been sought.
5. It was contended that the petitioner has the requisite qualification under Section 399 of the Act. The Petitioner is admittedly holding 25% of the Equity Share Capital before the impugned transfer of Shares. Reliance was placed upon the various judgments/decisions of the Company Law Board, being consistently followed over a period, including "Sangramsinh P Gaekwad and Ors. v. Shanadevi P. Gaekwad and Ors. wherein it was held that "Moreover, in the given case the court despite holding that no case of oppression has been made out may grant such relief so as to do substantial justice between the parties (para. 181 and 199)"; 1999 vol. 96 company cases 49. N.K. Mohapatra v. State of Orissa and Ors. (Division bench), and 2000 Vol. 99 company cases 57. Rajiv Mehta v. Groups 4 Securitas Hindustan Pvt. Ltd.
6. As regards the illegal/fraudulent transfer of shares, it was argued that the blank Share Transfer Deed(s) duly signed by the Respondents are in possession of the petitioners. These documents were shown in original during the course of hearing and it was contended that the original blank Share Transfer Deed(s), duly signed by the Petitioners were in the possession of the Respondents. Further, it was pointed out that the Petitioner is in possession of original share certificate(s) in respect of his entire Shareholding to the extent of 25%. Despite an Affidavit/Statement on oath, the Respondents have not been able to produce the original share certificate(s) claimed to have been in their possession. It was contended that a bald/oral submission by Respondents that the share certificates produced by the Petitioner were fake, can not be accepted, more so, when there is no denial of signatures on the Share certificate(s), and no allegation of forgery, etc.
7. Further, it was argued by the counsel for the petitioner that indemnity Bonds/ undertakings were signed as blank and handed over to the Respondents on the receipt of an advance of Rs. 2.50 Lacs. It was pointed out that it is not understood as to how these documents had been placed on records by Respondents No. 1 Company, who is not expected to possess these. It was contended that the date of transfer of shares has been intentionally chosen as 29th September, 2003, so as to take the said information in the Annual Return of the following year and consequently equently continue to hide the information from the Petitioner/Public for another one year. It was argued that the impugned transfer of share being in violation of Section 108 of the Companies Act, 1956, is liable to be set aside.
8. As regards illegal/fraudulent removal as Director, it was argued that a blank/undated letter of resignation was handed over to the Respondents, and a blank/undated letter of resignation signed by the Respondents is in possession of the Petitioner. It was pointed out that Form-32 dated 29th September, 2003, filed with the Registrar of Companies on 10th October, 2003 was signed by Mr. Ripusundan C. Tandon as Director on 29th September, 2003, whereas the said Mr. Ripusundan C. Tandon had already ceased to be Director on 26th September, 2003. The date of cessation as Director has been intentionally chosen as 29 September, 2003, so as to take the said information in the Annual Return of the following year and consequently to continue to hide the information from the Petitioner/Public for another one year. It was argued that the removal/cessation of the Petitioner as Director is, therefore, liable to be set-aside.
9. Further, it was argued that the Respondents have illegally/fraudulently adjusted Unsecured loan of Rs. 14,77,124/- of the Petitioner in the books of account for the year 2003-04 of Respondents No. 1 Company on the basis of a so called 'Written Settlement Agreement' which has never been produced by the Respondents despite repeated opportunity given to them. The said unsecured loan, it was argued, has become payable to the Petitioner forthwith.
10. My attention was drawn to objectionable conduct of Respondents by pointing out to false affidavit by the Respondents. It was contended that despite specific statement made by the Respondents on oath, the original share certificate and the written settlement agreement, claimed to have been in possession, have not been produced. The Respondents are, therefore, guilty of perjury and liable to be proceeded against accordingly. Further, it was contended that the Respondents have made attempt to sell/dispose off the property/assets of the Respondent Company. It was pointed out that the Company Law Board vide its Order dated 21st December, 2006, had, inter-alia, directed the Respondents to maintain a status quo in respect of Fixed Assets. The Respondents, however, showing complete disrespect to the Ld. Company Law Board proceeded to enter into an agreement to sell in respect of the Fixed Assets of the Company and got permission to shift the project to Rudrapur, the said order dated 21st December, 2006 was modified.
11. Shri Rajesh Yadav, Counsel for the Respondents arguing on the maintainability of the petition contended that the Petitioner does not possess qualification under Section 399 of the Companies Act and has no locus standi to file the petition, as he is neither a member nor a shareholder in the company, having ceased to be a Director w.e.f. 26.09.2003. The Petitioner had sold his entire shareholding to Respondent No. 7 and had signed the transfer deeds and handed over original shareholding. My attention was drawn to an undertaking dated 26.09.2003 confirming the sale of his shareholding, delivery of shares and receipt of full and final consideration. It was pointed out that on 29.09.2003 the company issued a relieving certificate to the Petitioner, which was in the handwriting of the Petitioner himself, as per his request. It was further contended that the company received instrument of transfer, properly stamped and executed by transferor and transferee with original certificates and thus, transferred the shareholding. It was pointed out that the Petitioner had used his resignation letter with the Indian Bank in order to get his collateral security (equitable mortgage) of his house No. F-3/20, Model Town, Delhi, released. He had requested the Respondent Company to write a letter to the bank for release of his guarantee on the ground that he had no association with the company, having resigned as a Director and having sold his shareholding. The Respondent Company wrote a letter dated 01.07.2004 requesting the bank to release the collateral and personal guarantee of the Petitioner, stating that he is no more Director in the company and he does not possess any shareholding of the company. It was argued that the Petitioner had concealed the undertaking, relieving letter, release of his personal bank guarantee and collateral security (mortgaged property) by the bank, upon his resignation as Director of the Company. The company had issued letter to the bank to release the security of the Petitioner. It was pointed out that the Petitioner's transaction with Respondent No. 7 was totally independent and if he has any claim against the Respondent No. 7, then he can proceed independently against him.
12. Further, the counsel for the respondents argued that the Petition raises disputed questions of fact, which can only be gone into by the Civil Court. Moreover, it was pointed out that the petition is barred by limitation and is bad for delay, latches and acquiescence, having been filed three years and three months after the resignation and transfer of shareholding. My attention was drawn to the fact that after resignation of the Petitioner, the company has become a profit making organization. It is paying its loans and is complying with other statutory requirements well in time. The business/profits are growing every year. It was pointed out that the unsecured loan of the Petitioner has been adjusted to his satisfaction. To support his contentions, the counsel for the respondents placed reliance upon various judgments reported at "Sangramsinh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad and Ors," Reference was made to paraNos.184, 185, 187, 189, 190, 204, 205, 206, 216 and 217 of the Judgment; 1999 Vol. 96 Company Cases 49, "N.K. Mohapatra v. State of Orissa and Ors. (Division Bench)"; 2000 Volume 99 Co. Cases 57, Rajiv Mehta v. Group 4 Securit as Hindustan Pvt. Ltd.
13. Further, it was argued that the conduct of the Petitioner leaves a lot to be desired and is to be strongly deprecated. The Petitioner did not file the share certificates, which he allegedly claims are with him on the record of the case. It was contended that the share certificate allegedly in the possession of the Petitioner would be forged and fabricated and an act of manipulation. At the time when the share certificates were originally prepared, the Petitioner was in-charge and in control of the affairs of the company, being its Managing Director and he might have prepared his certificates in duplicate and the other Directors might have signed bonafide and in good faith and without checking and verifying these certificates. The Respondent Company in natural course had decided to consolidate its shares. Therefore, it called for the original certificates from the shareholders, which were cancelled and destroyed and in their place fresh certificates were issued to the shareholders. Further, it was argued that the Respondent No. 4 (Sh. Rajiv Sanan) was permitted to have a look at the alleged shares produced for perusal by the Petitioner before the Hon'ble Board. Sh. Rajiv Sanan had demonstrated that the share certificates so produced by the Petitioner were fake. Some of the share certificates did not even have the common seal and on the remaining share the common seal was fake. It was also pointed out that the alleged share certificates do not bear the signatures of the two Directors and the Secretary or some other person appointed by the Board for that purpose, as per the requirement of Article 16 of the Articles of Association. Even otherwise, a strong objection was taken during the arguments on behalf of the Respondent that at this stage the Petitioner cannot drop the documents, without having filed the same at the relevant time. My attention was drawn to Rule 6 of the Companies (Court) Rules and Order 7 Rule 14 of the CPC. It was argued that the petitioner cannot take the Respondents by surprise by just producing some documents at the stage of final arguments, without actually filing them and giving a chance to the other party to rebut and controvert the said documents. The fact that the Petitioner at the relevant time did not file the documents and, in fact, did not file the documents right till the end, as by his own conduct, create suspicious circumstances about the genuineness, authenticity and reliability of the alleged share certificates. It was contended that it is crystal clear that the alleged share certificates on the face of it were forged and fabricated, otherwise, the Petitioner would have filed the same on the records of the present case. The Petitioner did not file the said documents on the record of this Hon'ble Board, as he knew that the said documents are forged and fabricated and he did not want to be foisted with a criminal case.
14. Considering the pleadings and the documents annexed therewith as well as the arguments of the parties I find that the preliminary objections raised in this petition by the respondents are not tenable. It has been argued by the respondents that the petitioner does not have the requisite qualification as per Section 399 of the Act to be able to maintain this petition under Sections 397 and 398 of the Act as his entire shareholding already stands transferred to respondent No. 7 as per the undertaking dated 26.9.2003 copy of which has been annexed to their reply affidavit at annexure R-7/I at page 13 which reads as under.
UNDERTAKING The undertaking is being given as regard to 2,50,000 equity shares of M/s Green Valley Frozen Foods Ltd. bearing Distinctive Nos. No. of shares 000501 to 000600 100 064141 to 080000 15860 16561 to 30560 11000 263001 to 274000 132000 947961 to 1000000 52040 131001 to 56000 25000 _________ 250000 The entire above share shareholding alongwith duly signed transfer deeds have been handed over to Sh. Ramesh Khanna S/o Sh. S.B. Khanna R/o 9/22, find Floor, East Patel Nagar, New Delhi.
I hereby confirm and undertake that I will not claim the consideration of above shares. The purchaser Sh. Ramesh Khanna can give the value of shares at his convenient period, which has finally been determined @Rs.5/- per share.
I hereby confirm receipt of Rs. 250000/- vide cheque No. 720423 dated 27.9.03 drawn on Canara Bank. New Delhi.
The purchaser Sh. Ramesh Khanna can get the shares transferred in his name or in the name of his attornees or nominees etc. I and my successor can not claim on the above share at any future date.
-Sd-
(M.L. Arora)
Dated 26/9/03 S/o sh. BhagwanDass
Arora Apartment, Sec-
tor-13, Rohini New
Delhi-110085
It was pointed out that the petitioner had signed the transfer deed and had handed over original shareholdings to the respondents confirming the sale of his shareholding by delivery of shares and receipt of full and final consideration. The Company had received instrument of transfer properly stamped and executed by transferor and transferee with original certificates and thus transferred the shareholding. This preliminary objection of the respondents has been refuted by the petitioner by producing the original share certificates during the course of hearing as per averment in the petition at para (ix) at page 12 stating that "the original share certificates are in physical possession of the petitioner and can be produced before the Hon'ble Board as and when required". It was pointed out by the petitioner that in early 2003 all the shareholders had decided to exit from the business and accordingly everyone was authorised to look for prospective buyers. Each of the groups had signed and executed the share transfer deeds, resignation of directors and other related documents and had handed over the same to each other only to reinforce the already existing mutual trust. Petitioner's shareholding was to be transferred to R-7. As per the representations of the respondents the petitioner had agreed to sell his shareholding for a consideration of Rs. 50 lacs as per their representation he had signed the share transfer deeds in respect of his shareholding. It was vehemently argued that the original share certificates are still in the possession of the petitioner, the Respondents had not complied with the provisions of Section 108 of the Act read with Article 50 of the Articles of Association of the company to give effect to the transfer of the shares and hence the purported transfer of shares allegedly effected by the respondents was void ab initio, it was done illegally, fraudulently with malafide in collusion and conspiracy with each other and with a view to defraud the petitioner. The petitioner also produced the original share certificates for my perusal and for inspection by the respondents. It was reiterated that despite several opportunities given to the respondents they had failed to produce the original share certificates to prove that the transfer had actually been given effect to. It has not been denied by the respondent company that the company in natural course had decided to consolidate its shares, therefore, it called for the original certificates from the shareholders which were cancelled and destroyed and in their place fresh certificates were issued to the shareholders. I find that the respondents have not been able to prove their case. Despite several opportunities provided instead of producing the original share certificates it was stated that original share certificate from the shareholders were cancelled and destroyed and in their place fresh certificates were issued to the shareholders which can no way can be in compliance with the provisions of Section 108 of the Act read with Article 50 of Articles of Association of the company. Further, their contention that the petitioner being its Managing Director he might have prepared certificates in duplicate and the other directors might have signed bonafide and in good faith without checking and verifying the certificates also does not establish their case. The petitioner has challenged the illegal transfer of shares. The Original share certificates are still in his possession. In these facts and circumstances of the case, there is no justification to hold that the petitioner does not have the requisite qualification under Section 399 of the Act and that he has no loucs standi to file the petition as he is neither a member nor a shareholder in the company on the date of filing of this petition. As regards the objection on maintainability of this petition in view of the necessary qualification under Section 399 of the Act, it is correct that in order to maintain a petition under Sections 397/398 the petitioner should hold either 10% or more shares of subscribed capital or should constitute 10% or more of total members in the company. In present case, the petitioner's shareholding is reduced below 10% or reduced to nil on account of illegal transfer of shares, the petition under Section 399 would be maintainable as the Company Law Board has taken a view that if the shareholding has been reduced below 10% due to allegedly illegal transfer of shares/further issue of shares which has been challenged in the Petition being one of the cause of action the petition cannot be dismissed at the threshold. As regards the respondents' next preliminary objection that the petition has been filed beyond the limitation period, having been filed three years and three months after the resignation and transfer of shareholding and it is bad for delay, latches and acquiescence, considering the argument of the petitioner in this behalf alleging illegal transfer of his shareholding the respondents' preliminary objection is not tenable because illegal transfer of the shareholding of the petitioner has permanent effect, it is continuous oppression. Hence, the argument regarding delay in filing this petition becomes irrelevant. The respondents' next preliminary objection is regarding the conduct of the petitioner. My attention was drawn to the fact that the petitioner had concealed the undertaking, relieving letter, release of his personal bank guarantee and collateral security by the bank upon his resignation as director of the company. The petitioner has also pointed out towards the unclean hands of the respondents stating that they had filed a false affidavit and that despite specific statement made by the respondents on oath, the original share certificates and the written settlement agreement claimed to have been in their possession were not produced even on specific direction in this regard. It was alleged that respondents are also liable for forgery for having fabricated several documents to prove their case, the original thereof were not available and that was the reason for non-production of the same. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. The petitioner seeking equitable relief must come with clean hand and good conduct, failing which the petitioner would constitute a gross abuse of process of court and the petitioner is not entitled to any reliefs under Sections 397 and 398. However, in the present petition there are allegations and counter allegations. In this view of the matter, I find no justification to dismiss the petition at the threshold on account of untenable preliminary objections raised by the respondents in this case.
15. Coming to the merits of the case, as pointed out earlier the respondents have not produced the original share certificates to prove their contention that the petitioner does not have the necessary qualification under Section 399 of the Act or that he is not a Member or a shareholder of the Respondent Company. On the other hand, the petitioner did produce the original share certificates which were also put for inspection by the respondents. The facts and circumstances of this case and the original share certificates produced during the course of hearing prove the petitioner's contention that his shareholding has been illegally transferred without following the due procedure as per the provisions of Section 108 of the Act read with Article 50 of Articles of Association of the company. Considering the fact that the averments in this petition filed under Sections 397/398 read with Section 111A of the Act have not been refuted by the respondent, I hereby set aside the illegal transfer of petitioner's shareholding shown to have been made on 27.9.2003 as null and void. Further, the respondent No. 1 Company is hereby directed to rectify the register of members accordingly forthwith.
16. As regards the petitioner's next allegation that he has been removed from the directorship of the respondent company, it is settled law that directorial complaints cannot be a ground in a petition under Sections 397/398 as the complaints in such a petition should be relating to the rights qua a member. It is only in the case of family companies or companies in the nature of partnership, denending on the facts of the case, directorial complaints have been adjudicated by this Board in Sections 397/398 proceedings. In this view of the matter, I find no justification to allow the petitioner's prayer in this regard. Even otherwise in this petition the respondents have been able to prove their case that the petitioner had resigned from directorship of his own and had filed his resignation letter with the banker to get released from his collateral and personal guarantee.
17. The petition is disposed of with the above directions. All interim orders stand vacated. All CAs stand disposed off. No order as to cost.