Company Law Board
Vinod Kumar Mittal vs Kaveri Lime Industries Ltd. And Ors. on 11 October, 1999
Equivalent citations: [2000]100COMPCAS66(CLB)
ORDER
S. Balasubramanian, Vice-Chairman
1. In this petition filed under Section 397/398 of the Companies Act, 1956 ("the Act"), by the petitioner claiming to hold 14.64 per cent, shares, alleging acts of oppression and mismanagement in the affairs of Kaveri Lime Industries Limited ("the company"), the main allegations are that he had been illegally removed as the managing director of the company, that further issues of shares have been made with a view to increase the shareholding of the respondents and that the second respondent is guilty of siphoning off funds of the company.
2. U. P. Mathur, advocate for the petitioner, initiating the arguments submitted that the company is a family company and that the petitioner is the elder brother of the second respondent and that both of them were the first directors not liable for retirement by rotation. The petitioner together with members of his group held 25.45 per cent, shares in the company and the second respondent with members of his group held 59.55 per cent. shares. According to him, the petitioner had been the managing director of the company right from incorporation of the company in 1987, and in breach of mutual confidence and trust, the second respondent started sidelining the petitioner from exercising his powers as the managing director. With a view to completely excluding the petitioner from the company, the second respondent removed all the records of the company kept in the house of the petitioner which was originally the registered office of the company to his own house. From a legal notice issued by Union Bank of India to the directors of the company, the petitioner noticed that four new directors had been appointed without any authority of the board or general body. The respondents, in their reply, have averred that in an extraordinary general meeting held on February 28, 1998, the petitioner was removed as the managing director and that four new directors were appointed. Mathur submitted that the petitioner never received any notice for the extraordinary general meeting nor the notice for the board meeting in which the decision to convene the extraordinary general meeting was taken. According to him, the provisions of Section 284 had not been followed in removing the petitioner as the managing director and since the petitioner is named as a permanent director in the articles of association of the company, he could have never been removed. He also pointed out that as per the loan agreement with the financial institutions, the petitioner could not have been removed without the consent of these financial institutions but without getting their approval, the petitioner had been removed as the managing director. Since the company is a closely held family company wherein the participation of the family members in the management of the company has been provided in the articles itself, the removal of the petitioner as the managing director is a grave act of oppression. He also pointed out that the respondents have not produced any evidence that notice was issued to the petitioner for the extraordinary general meeting. He also submitted that many of the shareholders whose affidavits have been filed along with the rejoinder have also averred that they had not received the notice for the extraordinary general meeting. He submitted that in the absence of notice to all the shareholders, the extraordinary general meeting could not be held to be a valid meeting and as such should be declared as null and void. He further submitted that from the reply filed it is seen that in the said extraordinary general meeting, the company had taken a decision to allot 4,445 shares which if allotted would upset the entire shareholding pattern of the company especially when the respondents have not established any justification for issue of further shares. He further stated that in the same meeting four new directors were reportedly appointed without any justification. Referring to item No. 6 of the minutes of the extraordinary general meeting, he pointed out that article 95 of the company has been amended to provide for appointment of fifteen directors which is in violation of the provisions of Section 259, according to which not more than twelve directors could be appointed to the board of a company without the prior approval of the Central Government. He further submitted that while the second respondent has been strengthening his hands by appointing his own directors, two sons of the petitioner who were on the board, are reported to have vacated the office of director in terms of Section 283(1)(g) of the Act. He submitted that the respondents have not given any details regarding the dates of the board meetings, which these directors did not attend, for the purpose of invoking the provisions of Section 283(l)(g).
3. He further stated that besides the above acts of oppression, the second respondent is guilty of mismanaging the affairs of the company including siphoning off funds of the company. As per Section 215 of the Act, the balance-sheet of a company has to be signed by the managing director, if any. However, without observing this statutory requirement by requiring the petitioner to sign the balance sheet, the same for the year ended March 31, 1997, was signed by two other directors. Therefore, the adoption of the accounts by the general body is irregular. Referring to para. 7.7 of the petition and annexure D to the petition, he stated that by two invoices with the same serial number 282, products of the company were sent to two different parties, which shows that there is irregular and questionable dispatch of goods. Since neither of them finds a place in the books of account of the company, it would only mean that the second respondent has siphoned off the proceeds. In the same way, proceeds for the invoices at annexures at pages 42-43 also do not find a place in the books of account indicating very clearly that the total amount involved in these four invoices of about Rs. 2.28 lakhs has been siphoned off by the second respondent. Further, as per the balance-sheet as on March 31, 1997, sundry debtors amounted to nearly Rs. 51 lakhs and the petitioner apprehends that this amount had already been collected from the customers arid pocketed by the second respondent. To substantiate this allegation, he pointed out that letters of confirmation of outstandings has not been obtained from the customers for the obvious reason that this amount has already been collected. Accordingly, he prayed for investigation into the affairs of the company to find out the quantum of money siphoned off by the second respondent. He further stated that the company has defaulted in the payment of due instalments to the financial institutions.
4. Summing up his arguments, Mathur submitted that the allegations made against the respondents clearly exhibit grave acts of oppression against the petitioner--a family member--and that the second respondent is guilty of mismanagement and siphoning oft1 of funds. Accordingly, he prayed that the petitioner be restored to the position of managing director and that the second respondent be removed as a director and that the share capital of the company should be restored as it existed before the allotment of further shares and an investigation into the affairs of the company be ordered.
5. Mittal, advocate for the respondents submitted that the petitioner has not come with clean hands and that this petition has been filed for ulterior purposes. Since the petitioner tried to dispose of a certain family property, the respondents obtained an order of injunction from a civil court and from that time onwards, the petitioner became inimical to the respondents and the company and started to conduct the affairs of the company as his own. When he was advised to conduct the affairs of the company in a proper manner, he made complaints to various authorities like the Electricity Board, Central excise, sales tax, etc., making various allegations against the company which resulted in raids by these authorities. Such raids had affected the reputation of the company. In view of the conduct of the petitioner, the shareholders of the company decided to remove him from the office of the managing director and accordingly requisitioned an extraordinary general meeting. In the extraordinary general meeting held on February 28, 1998, the general body passed a unanimous resolution removing him as the managing director. Therefore according to him when the shareholders have exercised their democratic rights for the benefit of the company, such exercise of right cannot be termed as an act of oppression. He further submitted, referring to the reports of the authorities that had conducted the raids, as enclosed with the additional documents, that all these authorities have given clean chits to the company as they had not found anything wrong.
6. In regard to the legality of the extraordinary general meeting, referring to pages 1-8 of the additional documents filed on September 22, 1999, wherein photostat copies of the certificates of posting have been enclosed, he contended that notices for the extraordinary general meeting were sent to all the shareholders including the petitioner on February 3, 1998. In this connection, he also referred to the copy of the dispatch register at pages 9-11 of the additional affidavit to state that these notices had been sent to all the shareholders. He also referred to the copy of the attendance register to state that many shareholders attended the extraordinary general meeting. Therefore, he submitted that the petitioner was removed as the managing director after due notice to him, but he did not choose to defend himself either in writing or by being present in the meeting. Accordingly, he contended that the petitioner cannot complain that his removal is illegal or oppressive.
7. In regard to the allotment of shares, he took us through pages 74-80 of the additional documents, wherein PICUP had advised the company that the promoters should bring in additional equity and stated that it was the reason that further shares were issued after getting the approval of the shareholders in terms of Section 81(1A) in the extraordinary general meeting and as such the bona fides of the allotment cannot be questioned. He, however, stated that if the petitioner is willing to participate in the promoters' contribution, the company is willing to allot shares to him.
8. In regard to the allegation of siphoning off of funds especially relating to Rs. 51 lakhs shown under "sundry debtors", he submitted that this allegation is entirely baseless and has arisen out of unfounded apprehension. He pointed out that the petitioner has not substantiated this allegation with any particulars. He also submitted that even when the petitioner was the managing director, the amount under "sundry debtor" was over Rs. 40 lakhs. He clarified that the amount out of "sundry debtors" under this head is from customers with whom the company has continuous business dealings and as such the balance outstanding always fluctuates and balance-sheet only indicates the outstanding on the date of the balance-sheet. In view of this, it is not correct to say that the money payable by the debtors has been collected by the company. He also referred to the list of the sundry debtors as on March 30, 1998, at page 87 of the additional affidavit to indicate that the outstandings are yet to be collected. Further, in regard to the allegation at para. 7.7 of the petition which was referred to by Mathur, learned counsel pointed out that these invoices are seen to have been raised when the petitioner was the managing director of the company and the same have been authenticated by him. He also stated that the customers to whom products of the company were alleged to have been sent as per invoices at pages 41-42 of the petition have informed the company that they have not received any goods in respect of those supplies. In view of this, learned counsel submitted that these invoices are fabricated ones just for the sake of implicating the second respondent in these proceedings with unfounded allegations.
9. He further stated that the company has been very prompt in repaying instalments of loan taken from UPFC and PICUP and these two institutions have sent certificates to this effect, copies of which are at pages 81-82 of the additional documents. Therefore, the allegations of the petitioner that the second respondent has been guilty of non-repayment of dues to the financial institutions and as such the second respondent has been mismanaging the affairs of the company is baseless. In regard to the amendment to the article, he submitted that the company has not appointed fifteen directors on the board.
10. Summing up his arguments, Mittal submitted that neither the removal of the petitioner on justifiable grounds by the general body nor allotment of shares could be claimed to be acts of oppression. He further stated that the petitioner has not established that the second respondent is guilty of mismanagement or siphoning off of funds. Therefore, he submitted that the petition should be dismissed.
11. We have considered the pleadings and arguments of counsel. Considering the family relationship between the parties, we advised them that they should attempt to resolve the dispute amicably. While the petitioner was prepared to go out of the company along with his group of members on a consideration of Rs. 200 per share, the respondents made a counter offer that they would be prepared to sell their shares to the petitioner for Rs. 125 per share. Both the groups expressed their inability to purchase the shares of the other for want of financial resources. In view of this, the compromise efforts failed and the petition was heard on the merits.
12. The acts of oppression complained of in the petition relate to his removal as the managing director and further issue of shares by which the percentage shareholding held by the petitioner was reduced and the acts of mismanagement relate to siphoning off of funds, non repayment of loan instalments to the financial institution and non-compliance with the provisions of the Act in the conduct of the affairs of the company.
13. In regard to removal of the petitioner as the managing director, the allegation is two fold--oppressive and illegal. According to him, he has been ousted from the management notwithstanding the fact that as per the articles he is a permanent director, and, therefore, such an ouster in a family company is an act of oppression. The normal principle of law is that directorial complaints cannot be considered in Section 397/398 petition. However, this Bench has been taking a view that this principle may not strictly be applied in respect of family companies or companies in the guise of partnerships wherein participation of the family members or partners is provided in the articles or established to have been agreed to by the members/partners. In such cases, removal of a member/a partner from the management could be considered to be an act of oppression (Vijay Krishan Jaidka v. Jaidka Motor Co. Ltd. [1996] 89 Taxmann 362 ; (1997) 1 Comp LJ 268, 285 CLB). In this case, even though the company is a public company, nevertheless, it is family company with two identifiable groups of shareholders and as per article 40, the petitioner, as also the first directors, are not liable for retirement by rotation. In other words, all are permanent directors and, therefore, it1 one is removed from the management, then he is justified in claiming that his removal is an act of oppression. However, such removal could be considered as an act of oppression only if it is established that the same was done either with a mala fide intention or with some ulterior motive. In this case, it has been established that the petitioner had acted against the interest of the company by writing complaints to various Government authorities resulting in their conducting raids on the company. No doubt, these authorities have given a clean chit to the company, yet, such raids do affect the reputation of the company justifying the shareholders to view the act of the petitioner as prejudicial to the interest of the company. The normal test to examine whether there is oppression or not, is to find out whether the majority shareholders, by strength of their shareholding, do things which are unfairly prejudicial, wrong burdensome and harsh, and there is an element of lack of probity or fair dealing, etc., in relation to the interest of minority shareholders. As long as the act is bona fide and in the interest of the company, then, even if such act affects the interests of a shareholder, he cannot complain of oppression. This Board in Atmarain Modi v. ECL Agrotech Ltd. [1999] 98 Comp Gas 465 (CLB) ; [19991 22 SCL 50 in which the principles of partnership were applied, held that the removal of the petitioner as a director in a general body meeting on the ground that he had taken away one of the major customers of the company to his own newly incorporated company, was not an act of oppression as he had acted against the interest of the company. In the same way, in the present case also the petitioner had acted against the interest of the company and as such the shareholders were justified in removing him as the managing director and as such his removal cannot be considered to be an act of oppression. The petitioner has also questioned the legality of his removal on the ground that notice for the extraordinary general meeting had not been given to him or to the members of his group and that the provisions of Section 284 had not been complied with and as such the decisions in that meeting should be declared as null and void and he also doubted the factum of holding the meeting itself. From the perusal the copies of the various records produced by the respondents in the additional documents, like certificates of posting, dispatch register, attendance slip of those who attended the meeting, the minutes of the meeting, filing of Form No. 32 within a short period of the meeting, etc., we are not in a position to come to a conclusion that the petitioner or his group of members had not received the notices for the extraordinary general meeting or that the meeting was not held. As far as the provisions of Section 284 are concerned, this Section stipulates that for removal of a director, a special notice in terms of Section 190 should be given and that the same should be sent to the director proposed to be removed and that he should have the right to be heard in the meeting. We find from page 27 of the additional documents that a shareholder had given a special notice dated January 20, 1998, and that the company had sent a copy of the same to the petitioner on February 4, 1998, (page 29). By a letter dated February 23, 1998, at page 30, a reminder was sent to him asking him to send his response to the notice. The counsel for the petitioner has not questioned the authenticity of these documents. Therefore, we find that the provisions of Section 284 have been complied with. In view of our findings as above, the question of declaring the proceedings of the extraordinary general meeting or the removal of the petitioner as the managing director, as null and void, being oppressive or illegal does not arise.
14. In regard to the alleged vacation of office by the two sons of the petitioner, viz., A. K. Mittal and P. K. Mittal, according to the company, they had vacated the office of director with effect from May 4, 1998, in terms of Section 283(1)(g) on May 4, 1998. During arguments, counsel for the respondents, referring to pages 23-25 of the additional documents, wherein copies of the notices for the board meetings on February 3, 1998, February 27, 1998 and March 31, 1998, have been enclosed, submitted that these directors did not attend these meetings in spite of notice and as such vacated the office in terms of Section 283(1)(g) of the Act with effect from May 4, 1998. We find from copies of letters at pages 16-17 of the additional documents that the company had written to both these directors on April 24, 1998, stating that since they had not attended three meetings of the board during the current quarter, they were liable to vacate the office of director in terms of Section 283(1)(g). We also find from the agenda for the meeting on May 4, 1998, (at page 26) that there was an item to discuss vacation of office by the directors. As per Section 283(1)(g), a director vacates his office if he absents himself from three consecutive meetings of the board or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board. As per this section, three months period would commence only from the date of the first meeting that a director absents himself from attending. From the letter dated April 24, 1998, addressed to the directors by the company, it is seen that the company had taken a stand that these directors had not attended three meetings during the current quarter. Perhaps, the company's stand is that these directors vacated the office for absenting themselves from the board meetings on February 3, 1998, February 27, 1998, and March 31, 1998. The letter dated April 24, 1998, is not in line with the provisions of Section 283(1)(g) and as such is wrong inasmuch as the three months period from February 3, 1998, would expire only on May 2, 1998. However we note that the next board meeting was held only on May 4, 1998, and the company also filed Form No. 32 indicating therein that these directors vacated the office of director with effect from May 4, 1998. Since counsel for the petitioner did not contest the authenticity of these notices, we have to perforce come to the conclusion that these directors had vacated their office by operation of law.
15. As far as the issue of further shares is concerned, even though the general body authorised the board of directors to issue 4,445 further shares, yet, no details have been furnished as to when and to whom the shares were allotted. However, we are not examining this issue in detail as counsel for the respondents fairly stated that if the petitioner is prepared to contribute, the company would allot shares. W close this issue by giving the option to the petitioner to apply for his entitlement on the basis that the additional shares of 4,445 would be treated as a rights issue.
16. In regard to the allegation at para. 7.7 of the petition that the amount of Rs. 2.3 lakhs receivable for the supplies made to certain parties has been siphoned off by the second respondent, we are satisfied with the arguments of counsel for the respondents in this regard. The same is the position with regard to the alleged pocketing of Rs. 51 lakhs under "sundry debtors". The main argument in this regard by Mathur was that the auditors of the company had not obtained confirmation letters from these sundry debtors and, therefore, the apprehension is that the money should have been collected by the respondents. However strong one's suspicion or apprehension be, in the absence of any iota of proof substantiating such suspicion or apprehension, we cannot take cognisance of the same. Mathur pleaded for investigation into this matter, which we feel, cannot be ordered without proper material as it would only amount to a roving inquiry without any basis.
17. In regard to the amendment of article 95, the respondents have stated that the company has not acted in terms of the amended article and has not appointed fifteen directors. Section 259 only stipulates that increase in the number of directors shall not take effect unless approved by the Central Government. Therefore, the company is bound to seek the Central Government's approval before acting in terms of the amended article. There are certain other allegations in the petition, like, the second respondent having entered into an agreement with the company to run the factory and non-payment of the agreed sum of money for doing so, shifting of the registered office of the company from the residence of the petitioner to the residence of the second respondent, etc., which were not argued by counsel for the petitioner, perhaps because of the explanation given by the respondents in their reply and as such we are not dealing with these allegations.
18. From our conclusions on the allegations, it is apparently clear that the petitioner has not made out that the respondents are guilty of either oppression or mismanagement in the affairs of the company and as such the petition deserves to be dismissed, Even in such cases, this Bench has been taking a view that in the interest of the company, more so in respect of a family company, one of the groups should go out of the company for proper consideration, In this case, both the groups have expressed their inability to purchase the shares of the other group for want of financial resources. Therefore, no directions in this regard could be given. However, we find that the petitioner has given certain personal guarantees to the financial institutions. Now that he is no longer a director on the board of the company, equity demands that he should be released from his personal guarantees. We find from the letter of PICUP at page 79 of the additional documents that PICUP would be prepared to release the personal guarantee of the outgoing directors once proper personal guarantees are given by the incoming directors. In view of this, we direct that the respondents should take expeditious action to get the personal guarantees given by the petitioner released by the financial institutions.
19. With the above direction, we dispose of this petition. No order as to costs.