Company Law Board
Shri J.K. Paliwal And Shri B.K. Paliwal vs Paliwal Steel Ltd. And Ors. on 31 May, 2007
Equivalent citations: [2008]141COMPCAS624(CLB), [2008]81SCL121(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering CP No. 71/2005 filed by Shri J.K. Paliwal and Shri V.K. Paliwal under Sections 397 and 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act') alleging certain acts of oppression and mismanagement by the respondents particularly by R-8 namely Shri Ajay Paliwal son of petitioner No. 1 namely, Shri J.K. Paliwal.
2. The undisputed facts of the case are: The respondent company namely M/s Paliwal Steel Ltd. was incorporated on 27.10.1970 as a private limited company and with effect from 25.8.1983 the word private was deleted from its name as per the provisions of Section 43A(1A) of the Act. The company is having its Regd. Office at Alpana Cinema Building Model Town, Delhi. The authorised capital of the company at the time of incorporation was Rs. 7,50,000 divided into 7500 equity shares of Rs. 100/- each. The authorised capital was subsequently raised during Aug. 1971 to Rs. 25,00,000/- comprising 25000 equity shares of Rs. 100/-. The paid up share capital of the company as on 30.9.2004 was Rs. 11,00,000 divided into 11000 equity shares of Rs. 100/- each. The main business of the company is that of Iron and Steel founders alloy and steel makers, steel convectors and to establish steel Re-rolling Mills. The petitioners' hold 47.71% shares in the R-1company, the respondent shareholding is 37.29% and the remaining 14.99% is held by the others.
3. Shri Virender Ganda, Counsel for the petitioners pointed out that the Petitioner along with certain other Shareholders collectively holding 5,249 Equity Shares of Rs. 100 / each, credited as fully paid-up, forming 47.71% of the total share Capital, filed the aforesaid petition and inter-alia challenging Form No. 32 filed with the Registrar of Companies on 28th April, 2004 under the forged signature of Petitioner No. 1 in respect of illegal appointment of (i) Shri. Manish Paliwal (Respondent No. 3) S/o Shri. N K. Paliwal (Respondent No. 2) and (ii) Shri Abishek Paliwal (Respondent No. 4) S/o Shri Ajay Paliwal (Respondent No. 8); illegal and unauthorized Sale of Flat No. 105, Golf Apartments, Sujan Singh Park, Lodhi Road, New Delhi to Smt. Vijaya Paliwal (Respondent No. 5) w/o Shri. Ajay Paliwal (Respondent No. 8) and Smt. Kamlesh Paliwal (Respondent No. 6) w/o Shri N.K Paliwal (Respondent No. 2) for a meager consideration of Rs. 25 Lacs, which in turn has been repaid to Shri Ajay Paliwal (Respondent No. 8) Smt. Jyotsna Paliwal (Respondent No. 9) sister of Shri. Ajay Paliwal (Respondent No. 8) and Shri Rajiv Paliwal (Respondent No. 7) s/o Shri N.K. Paliwal (Respondent No. 2), all transactions i.e. execution of Sale deed, exchange of consideration and then payment to Respondent No. 7, 8 and 9 within the family happening on the one single day.
4. Shri Virender Ganda, Counsel for the petitioners pointed out that since the Company (R-1) is not carrying out any regular business activity, the Company's bank account at New Delhi had become inoperational for quite some time, the petitioners in order to complete the annual accounts of the Company however get the periodical statement of account from each of the bank from time to time. The petitioners were shocked to observe from the statement as received from Respondent No. 12 Union Bank of India, Delhi. Current Account No. 419001010026102 for the month of July, 2005 that the entries worth lacs of rupees have suddenly appeared without there being any business activity of the Company during this period. The details of the deposits and withdrawals, all made on the same day i.e. 8.7.2005 were found as follows:
Deposits Rs. 12.50 lakhs (by two cheques) from Smt. Kamlesh Paliwal (Respondent No. 6) w/o Shri Nawal Kishore Paliwal (Respondent No. 2); Rs. 12.50 lakhs (by two cheques) from Smt. Vijaya Paliwal (R-5) w/o Shri Ajay Paliwal (R-8);
Withdrawals:
Rs. 1,23,000 by way of pay order favouring Manish Paliwal (R-3) S/o Shri N.K. Paliwal (R-2); Rs. 40,300/- by way of pay order favouring Shri N.K. Paliwal (R-2); Rs. 91,300/- by way of DD favouring Shri Rajiv Paliwal (R-7) S/o Shri N.K. Paliwal (R-2); Rs. 12,45,250/- by way of cheque favouring Ajay Paliwal (R-8) S/o Shri J.K. Paliwal (P-1); Rs. 10,00,000/- by way of pay order favouring Smt Jyotsna Paliwal (R-9).
5. Shri Ganda argued that the petitioner made further investigation into the details of the transactions and shockingly found that the R-2 and 9 colluding and conspiring with other respondents had allegedly attempted to sell and transfer the said Flat to respondent No. 5 and 6 as per the agreement to sell dated 7.7.2005. It was emphasised that the Company (R-1) had never even discussed or contemplated the sale or transfer of the said flat to any one whatsoever and nor had the company authorised any person to take such action on its behalf. It was pointed out that the market value of the purported property has now touched Rs. 1 crore and the rights are purportedly attempted to be transferred at a meager price of Rs. 25,00,000/- vide the purported agreement to sell and purchase dated 7th day of July, 2005. The respondent Nos. 2 to 9 fraudulently and clandestinely attempted to transfer the rights of the company in the said Flat in favour of Respondent Nos. 5 and 6 wife of Respondent Nos. 2 and 8 respectively. The aforesaid agreement, it was argued, was signed by Shri N.K. Paliwal (R-2) on behalf of the Company and was registered with the office of Sub-Registrar Vikas Sadan, New Delhi. Further, it was pointed out that the petitioners then approached R-10, M/s Universal Builders and Contractors and requested them to mark caution against any intimation regarding the transaction for sale or transfer of aforesaid Flat. It was argued that the alleged sale/transfer of flat is unauthorized and illegal. The company has not made any sale of the above flat or has intent to even transfer or convey it in any other form or manner. The petitioners were also intimated that the original title deeds are misplaced and may be used to seal the alleged transfer or mutation. The petitioenrs were able to put the flat in question under the lock and key of the company i.e. R-1 and put the security guard to look after the flat security through agency of Dagar Security Services P. Ltd. Further, it was pointed out that the petitioners also requested R-11, the President Golf Apartment Owner's Welfare Association, to safeguard the possession of the flat in question and take certain protective measures.
6. It was further pointed out by the counsel for the petitioners that the petitioners then apprehending something further illegal actions by the respondents, went and inspected the records of Respondent No. 15, the Registrar of Companies, N.C.T. of Delhi and Haryana, where it was found that Form No. 32 datedl.4.2005 was filed on 28.4.2005 by the respondent, allegedly signed by petitioner No. 1 in respect of appointment of Respondent No. 3 and 4 as Additional Directors. The petitioners obtained the copy of the said form and found that the signatures of Shri J.K. Paliwal (Petitioner No. 1) on the said form No. 32 were not genuine. In order to verify the fact of forgery the petitioners referred the matter to a hand-writing expert who confirmed that the signatures on the said Form No. 32 were different from the admitted signatures of Shri J.K. Paliwal (Petitioner No. 1). Thereafter the petitioners immediately made a complaint dated 27.7.2005 to DCP, Economic Offence Wing, Qutub Institutional Area, New Delhi regarding the aforesaid fraud and forgery.
7. Responding to the Preliminary Objections raised by the Respondents that the Petitioners have allegedly not come with clean hands as the Factory Land and building situated at Village Jarunda, Meerut Road, Muzafarnagar, U.P. of the Company was let out to Smt. Vijayalaxmi Sharma, sister of Petitioner No. 2 in terms of a registered long term lease deed in 1999, the counsel for the petitioners contended that the Respondents had never ever objected to the aforesaid lease for the last 7 years, knowing fully well that the lease was executed with Unanimous Consent of all concerned and was considered as in the interest of Company by one and all. The issue now raised by the Respondents clearly appears to be an afterthought and a false alibi. The fact that the Respondents were fully aware of the aforesaid lease and deciding to remain silent for 7 years is clear manifest of their unqualified consent and agreement to the aforesaid lease. In any case, it was argued to justify their own wrongs, they cannot take the shelter of a transaction which happened 7 years ago.
8. Responding to the respondents allegation that the petitioners had committed contempt by flouting the CLB's order dated 9.9.2005 by opening a new bank account at the back of the respondents, the counsel argued that (i) the opening of a new bank account was necessitated on the receipt of a refund of the Income Tax and some other payment which had to be collected and credited to the Company, the main account having been ordered not to be operated. The payment received as aforesaid have been used only to discharge the liabilities of the Company through account payee cheques, (ii) A cash amount of Rs. 10,000/- withdrawn from the Bank vide cheque No. 053355 dated 20.9.2006, was deposited with the Bank Account immediately on receipt of the order dated 21.9.2006 of the Company Law Board. The Petitioners' action has, therefore, been in the interest of the Company and is not against the order of the company Law Board. "
9. Responding to the contention of the respondents that the conduct of the petitioners in other proceedings namely in CP No. 78/2005 is also to be noted with regard to the loan of Rs. 64.50 lakhs to their relatives (brother-in-law, sisters and month-in-law of P-1) who have now even refused to confirm the transfer of aforesaid quantum of money in their favour which is prejudicial to the interest of the R-1, Shri Ganda argued that the advance was given in the year 2002 and that too with the consent of all the then directors, the respondents have been consistently signing the annual accounts year after year until the year 2003-2004 and that such old matters to which the respondents themselves have consented, waived and acquiescesed cannot be raised to take support for justifying their own wrong actions.
10. Further, responding to the Respondents' contentions that in order to attract the jurisdiction of the Company Law Board under Sections 397 and 398, the circumstances must exist justifying the winding up of the Company on just and equitable grounds, Shri Ganda argued, do not merit any consideration. The issue has been dealt in detail by the Hon'ble Supreme Court in various matters including "Sangramsingh P. Gaekwad and Ors v. Shanta Devi P. Gaekwad (Dea) THRO' LRS. And Ors. ". The Company Law Board has considered the matter further in Giridhar Gopal Dalmia and Ors. v. Bateli Tea Co. Ltd. and Ors. (2006) 74 CLA 36 (CLB), wherein the Scope of Section 397 and 398 has been discussed in details and the Petitioners' case falls squarely within its scope.
11. The counsel for the petitioners argued that no Board meeting had ever taken place on 1st April, 2005, as alleged. The Company had all along three promoter Directors, out of which two, along with other holding 47.7% of the Share Capital are the Petitioners. There has never arisen any need to expand the Board of Directors particularly, when the Company is not carrying on any business activity. The provisions of Section 286 have not been complied with as the Petitioners did not receive any notice in writing for the Board meeting of 1st April 2005; The Appointees had not filed their consent / form No. 32 with the office of Registrar Companies. It was further pointed out that Form No. 32, as discovered, was filed with the office of the Registrar of Companies under the forged signature of Petitioner No. 1. My attention was drawn to handwriting expert's (Pt. Ashok Kashyap) report evidencing the forgery It was pointed out that the report of handwriting expert (Mrs. R.K Vij) placed on record by the Respondents suffered from several discrepancies; Documents received (Q1 and Q2) when compared (Marked as 1 to 6 & 6/1, 7 to 9, 9/1) were not authenticated / verified by the expert neither by signature or initials nor by any rubber stamp, etc; Juxtaposition Chart was not placed on record, which is essential for the purpose of comparison between the Admitted and Disputed Signatures; the two documents were to be compared in a photograph with the same degree of enlargement; the report did not indicate the degree of enlargement used by the expert; the expert had used the two terms "variation" and "differences" simultaneously making the report as conflicting with itself. Further, the circumstances never warranted expansion of the Board of Directors and, therefore, there is no question of Petitioners having agreed to such expansion.
12. Regarding the sale of Flat No. 105 Golf Apartment by the respondents, the counsel for the petitioners pointed out that neither the Board of Directors nor the Share holders have ever authorised the sale of flat. Shri. N.K. Paliwal, Respondent No. 2 had no valid power of attorney to sign the sale documents on behalf of Company; Provision of Section 293(1)(a) with regard to sale or disposal of whole or substantially the whole of the undertaking, had not been complied with; the consideration of Rs. 25 Lacs as per the Sale documents is insignificant as compared to the market value of the flat; repayment of unsecured loan had been made on selective basis to the family members of Respondents; the transactions were within the family members of Respondent No. 2, who had signed the Sale documents on behalf of the company without any authority; the Sale consideration deposited in the bank on 08th July, 2005 was withdrawn on the same day by making payments to the family members of the Respondents; The whole transaction is of sham nature and gives a clear picture of foul smell. Respondent No. 2 and 3 had initially taken a stand that Respondent No. 4, 5, 8 and 9 being the beneficiaries of the aforesaid transaction of Sale of Flats etc. belong to the Petitioners Group, without realizing that they and R-7 had to join Respondent No. 4, 5, 8 and 9 in defending and thus retracted their statement without pressing the same.
13. Shri U.K. Chaudhary, Counsel for the respondents argued that the present Petition under Section 397/398 of the Companies Act, 1956 is not maintainable as the Petitioners have failed to show that the affairs of the company are being conducted in a manner oppressive to any member/creditor of the company or there are grounds for the winding up of the company. The counsel raised a preliminary objection that the conduct of the petitioners disentitles them from any relief from this Hon'ble Board. It was pointed out that the petitioners have illegally opened a new bank account in direct violation of the order passed by this Hon'ble Board in Canara Bank, Paschim Vihar, Delhi being account No. 217, and several transactions took place in the said account without the knowledge and concurrence of the applicant / respondents. It was argued that the bank account was opened unauthorisedly and without taking permission of respondent No. 1 company and no board resolution to authorize the petitioners to open and operate the Bank Account was passed. My attention was drawn to the CLB's order dated 09.09.2005, granting status quo of the fixed assets and also directing that the bank accounts of the company shall not be operated. The said order was passed as a consent order and the respondents thereafter had not operated the bank accounts of the company. However, the petitioners themselves behind the back of the respondents and this Hon'ble Board not only opened a new bank account but also siphoned huge sums of money through the new bank account. Further, forged documents were submitted with the bank including forged extracts of minutes of the Board Meeting, when no board meeting of the company had been held. Further, it was argued that a bare perusal of the documents show even the correspondence address has been shown that of the petitioners and their family members and not the registered office of the company, so that, the respondent should not even be aware of the opening of the bank account. When the respondents came to know of the opening of new bank account an application being C.A. No. 320 of 2006 was filed and this Hon'ble Board vide order dated 21.09.2006 freezed the new bank account. However, the petitioners even after the order passed by this Hon'ble Board on 21.09.2006 withdrew a sum of Rs. 10,000/- on 23.09.2006 it was only when the same was pointed out by the respondent the said amount was be deposited with the bank. Furthermore, the bank statement clearly shows the purpose of opening the said bank account. It was pointed out that the petitioners being aware of the Income Tax Refund opened the new bank accounts and after depositing the Income Tax Refund subsequently withdrew the said amount in order to siphon of the same. The petitioners instead of seeking permission of this Hon'ble Board either to open a new bank account or to deposit the Income Tax Refund in the existing accounts, willfully opened the new bank account to siphon of the said amount. Therefore, it was argued, the conduct of the petitioners is malafide and the petitioners have played a fraud on this Hon'ble Board and have suppressed the Income Tax Refund and the further amount received. The petitioners are disentitled from getting any relief from this Hon'ble Board. Reliance was placed on this ratio the judgment of Hon'ble Supreme Court in the matter of MCD v. State of Delhi and Anr. quoting Para 21 at page 610-611 as under:
21. This apart the respondent did not also disclose the fact in the criminal revision filed before the High Court that he has also been convicted in another Criminal Case No. 202 of 1997 by the Court of Metropolitan magistrate, Patiala House, New Delhi. Thus, the contesting respondent has come to the High Court with unclean hands and withholds a vital document in order to gain advantage on the other side. In our opinion, he would be guilty of playing fraud on the Court as well as on the opposite party. A person whose case is based on falsehood can be summarily thrown out at any stage of the litigation. We have no hesitation to say that a person whose case is based on falsehood has no right to approach the court and he can be summarily thrown out at any stage of the litigation
14. The counsel for the respondents contended that the Petitioners are also guilty of siphoning away the other property in Muzaffarnagar in favour of the near relatives (mother-in-law of the son of the petitioner No. 2) in the year 1999. The Petitioner No. 2 has given the 33 bighas (27000 Sq. yards approximately) situated at Muzzaffarnagar which was the factory land of the Respondent Company on 99 years lease to his near relatives without any knowledge and concurrence of the Respondent No. 1 Company and other Directors. It was argued that the petitioners have leased out the said land at a minimal rate of 2,000/- p.m. without the knowledge and concurrence of the respondents. Further, even the lease rent has not been received by the company, except now in the latest balance sheet of 31.03.2006 when the same was objected by the respondents which clearly shows that the whole purpose of the lease is to siphon of the major property of the Respondent Company and deprive the majority shareholders of their legitimate rights in the Respondent Company. Further the lease received by the respondent company was also deposited in the newly opened Canara bank Account which has also been siphoned off by the petitioners, wherein, cheques have been issued in favour of the relatives of the petitioners. It was argued that the conduct of the conduct of the petitioners clearly disentitles them from any relief from this Hon'ble Board and the petitioners cannot claim oppression when they themselves are the oppressor. It was pointed out that that no Board Meeting has been held and the lease is in direct violation of the provisions of the Companies Act, 1956. In this regard the judgment of Nurcombe v. Nurcombe and Anr. 1985 1 All ER 65 was relied upon wherein the Court of Appeal, England has clearly held in case of an action by the minority shareholder, the locus standi for filing the same has to be considered on the conduct of the plaintiff and in case the conduct of the plaintiff is inequitable the same is liable to be rejected. The para at page 70 and para at page 71 were quoted which read as under:
My understanding of these judgments is that the court is entitled to look at the conduct of a plaintiff in a minority shareholder's action in order to satisfy itself that he is a proper person to bring the action on behalf of the company and that the company itself will benefit. A particular plaintiff may not he a proper person because his conduct is tainted in some way which under the rides of equity may bar relief. He may not have come with 'clean hands' or he may have been guilty of delay It is for this reason that, in my judgment, a court of equity will not allow a minority shareholder to succeed in a minority shareholder's action where there are equitable defenses which as between the shareholder personally and the defendants, the defendants could properly rely on in equity, e.g. the duty to elect between conflicting rights, acquiescence or laches of the minority shareholders Therefore, it was argued that the same is liable to be set aside and respondents and their family members be directed to deposit the lease rent for the period from the date of the lease i.e. in 1999 till now and the petition is liable to be dismissed on this ground alone.
15. The counsel for the respondents further argued that the petitioners have also filed another Company Petition being CP No. 78 /2005 in another family company namely Paliwal Hotels Private Limited. It was pointed out that the petitioners in the said company have illegally transferred 65 lacs of sum to their family members i.e. in favour of his brother- in-law and mother-in-law without knowledge and concurrence of the respondents. Further, it was argued that it is a settled law that the conduct of the parties is vital in an adjudication of a matter, and the same is more so relevant, in the present equitable jurisdiction of this Hon'ble Board. It was pointed out that the it has been held by the Hon'ble Karnataka High Court in the matter of Srikant Datta Narasimharaja Wadiyar v. Sri Ventateshwara Real Estate Enterprises P. Limited and Ors (judgment dated 20.04.1989) that the conduct of the parties in not only the present proceedings but also in other proceedings is relevant and to be seen. The High Court has categorically observed:
That takes me to the question of good faith of the petitioner in presenting these company petitions. The question of good faith has to be tested by the conduct of the petitioner as reflected not only in the proceedings before this court but also in parallel proceedings in the civil courts and in other civil litigations in other courts.
Thus, it was argued that the present petitioner's are not entitled to any relief from this Hon'ble Board and the present petition ought to be dismissed in limine without going into the merits of the case.
16. As regards the sale of flat of the R-1 located at Golf Apartment for a consideration of Rs. 25 lacs to their relatives, it was argued by the counsel for the respondents that the said sale of the flat is a legal and valid for the reasons that (a) Consideration was paid, an amount of Rs. 25 lacs was paid by the purchasers to the company for the purchase of the said flat, the petitioners cannot state that the flat has been sold by the respondents without consideration; (b) Respondent No. 2 - Mr. N.K. Paliwal as per authorisation has duly signed on behalf of the company, therefore the petitioners cannot state that the company has not executed the flat validly; (c) the agreement to sell was executed between the respondent company and the purchaser, the necessary stamp duty was also paid by the parties, further the respondents have also shown the copy of the sale deed dated 18.03.2005 showing the market rate of the area Therefore, it was argued that the petitioners cannot state that the agreement and sale was illegal; (d) The respondents have also clearly stated the need to sell off the flat of the company. It was pointed out that the said flat was sold off to pay off the unsecured creditors of the company who were demanding their unsecured loan given to the company as neither any interest nor the loan amount was paid off to them. Therefore, it was argued that the respondents beyond doubt have shown that the sale of flat was legal and valid and the same is liable to be confirmed by this Hon'ble Board and no relief in respect of the flat property can be granted to the petitioner. It was pointed out that on the contrary they have leased out the major property of the company without any authority and valid consideration and are thus not entitled for any relief from this Hon'ble Board.
17. As regards the appointment of Respondent No. 3, Shri Manish Paliwal and Respondent No. 4 Shri Abhishek Paliwal as additional director of the respondent company, it was argued that the said appointment is legal and valid because the Form 32 was filed on behalf of the respondent No. 1 company has been signed by the petitioner No. 1 only, therefore, their appointment is legal and valid and the petitioners cannot deny the same at belated stage. Though the petitioners have now, through a report of the expert, have stated that even the signature of petitioner No. 1 on Form 32 is forged, the Respondents in response to the same have also taken a report of an expert wherein the report of the expert clearly states that the signature on Form 32 is of the petitioner No. 1 only. Therefore, the petitioners were fully aware of the appointment of Respondent No. 3 and 4 as Directors and they cannot resile from the same at this stage Further, it was argued that the said appointment has been made in order to give younger generation of the family a chance in the business of the company. Therefore, the said appointment was made with the consent of all the parties and therefore the Form 32 was signed by the petitioner No. 1 himself. However, he is back tracking at a belated stage as an after thought. Further, it was argued that the report filed by the petitioners and counter report filed by the hand writing expert are not to be relied in a summary jurisdiction of Section 397/398 and the petitioners ought to have filed appropriate proceedings for the same. It was argued that the petitioners' reliance upon the judgment of Girdhar Gopal Dalmia v. Bateli Tea Co. Ltd. (2006) 74 CLA 369 (CLB) is misplaced, the judgment and facts of Bateli Tea Co. Ltd. are entirely different from the present case. The para 25 relied upon by the petitioners are not applicable to the present case as this Hon'ble Board will exercise its power Under Section 402 only when a case is made out. Further, in the present case the malafide and illegal conduct of the petitioners disentitles them from any relief from this Hon'ble Board. Therefore, it was argued that the judgment relied upon by the petitioner is not applicable and it liable to be ignored. Therefore, it was argued that the appointment of the respondent No. 3 and 4 as additional director is legal and valid and the petitioners are not entitled for seeking any relief from this Hon'ble Board.
18. Further, it was argued by the Counsel for the respondents that no case of oppression and mismanagement has been made out by the petitioner in the present petition. The only grounds taken by the petitioners relate to the sale of the Golf Links Apartment and appointment of Additional Director. The petitioners are seeking a declaration to declare the sale of flat as null and void which can only be adjudicated upon by filing a civil suit and the same cannot not be granted in a summary jurisdiction of 397, 398. As regards the appointment of additional directors are concerned, it is settled law that no complaints of directorial rights can be made in 397 398 petition. It was argued that the same is a settled law in view of the judgment of Hon'ble Supreme Court in the matter of Hanuman Prasad Bagree v. Bagrees Cereals Pvt. Ltd. and Ors. . Further, reliance was placed upon the judgment of Hon'ble Supreme Court in the mater of Shanti Prasad Jain v. Kalinga Tubes Ltd. (1965) 35 CC 351. Quoting as under:
In a petition under Section 397 of the Companies Act, 1956, it is not enough to show that here is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of Section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of a company's affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder.
19. I have considered the pleadings and the documents filed therewith as well as the arguments of the parties. I find that the preliminary objections raised by the respondents in this case are not tenable. The respondents have argued that the petitioners have not come with clean hands to the CLB and in this regard their conduct even in other proceedings i.e. in CP No. 78/2005 is also to be noted. It has been pointed out that the petitioners have several times acted against the interest of the R-1, as pointed out in CP No. 78/05 they have transferred an amount of Rs. 64,50,000/- in favour of their nearest relatives who have now willfully refused to confirm the receipt of the said amount, then the petitioners' conduct in the proceedings in another matter which is under consideration in CP No. 71/05 is to be noted, they have opened a separate bank account without the knowledge of the respondents and without the permission of the CLB, the account has been frozen now, a contempt petition in this regard is pending, the petitioners have illegally transferred the R-1's land in favour of P-1's brother-in-law and mother-in-law without the knowledge and concurrence of the respondents. As regards the conduct of the petitioners in the proceedings in this petition as well as in CP No. 78/05 which has also been heard by me, 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 of the Act. The court exercising equity jurisdiction cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands. The circumstances of this case have been such that the father has turned against the son. Both the parties have endeavoured to get control of assets as well as shares in the R-1. As regards the conduct of the petitioners, the respondents have raked up old issues which they had already waived and acquiesceased by their conduct in the past, instances given are of loan given to relatives in the year 2002 which has been questioned now when the petitioners filed CP No. 78/05. This issue has been raked up now by the respondents while giving their counter to the CP No. 78/05, the respondents have no such complaint or CP pending on this issue prior to filing of CP No. 78/05 or CP No. 71/05 of the petitioners. The respondents' plea of unclean hands in respect of such old matters cannot be considered now due to latches as well. Now they cannot take support in the earlier conduct of the petitioners which they have waived and acquiesceased in the past in 2002. The respondents have not controverted the petitioners plea in this regard that the advance was given in the year 2002 with the consent of all the then Directors, the respondents have been signing year after year the Annual Accounts reflecting this advance. As regards the conduct of the petitioners in CP No. 71/05, I find that the petitioners have explained that a separate bank account was opened to take credit for Income Tax refund and some other payments which had to be collected and credited to the company as the same could not be deposited in the bank account which was not to be operated due to CLB's order dated 9.9.2005 whereby status quo with respect to the properties of the company as of date was to be maintained and the bank account of the company was not to be operated, in this respect it was explained by the petitioners that the payments received were utilised for the respondent company by issuing account payee cheques. It is true that the new bank account was frozen by the CLB but the respondents statements in this regard are incorrect and untrue as the CLB's order dated 9.9.2005 pertained to the then existing bank account and not the new bank account opened subsequently. However, this matter raised by way of contempt application No. 320/06 has received due consideration in CP No. 71/05 being disposed off in this order. The petitioners have successfully explained their position and no case of contempt can be made against them. As regards transferring of factory land as alleged by the respondents to highlight the conduct of the petitioners, the petitioners reply in this regard deserves to be mentioned wherein they have contended that respondents had never ever objected to the aforesaid lease deed in 1999 for the last seven years, the respondents were fully aware of the transaction and decision was taken unanimously with the consent of all concerned in the interest of the company by one and all. Agitating this matter now after seven years after giving unqualified consent and agreement to the aforesaid lease taking shelter in this transaction is only an afterthought and a false alibi to justify their own wrongs. As regards the respondents' contentions that there is no just and equitable ground for winding up of the company, rightly pointed out by the counsel for the petitioners, relying on the Supreme Court's decisions in Sangramsingh P. Gaekwad and Ors v. Shanta Devi. Gaekwad (Dea) Thro' LRS. and Ors. ", do not merit consideration. The counsel for the petitioners has rightly pointed out that this matter has been further considered in Giridhar Gopal Dalmia and Ors. v. Bateli Tea Co. Ltd. and Ors. (2006) 74 CLA 36 (CLB), wherein the Scope of Sections 397 and 398 has been discussed in details and the petitioners' case falls squarely within its scope. I find that the respondents' contention that since the petitioners have not come with clean hands their reliance on the CLB's decision in Giridhar Gopal Dalmia's Case (Supra) is misplaced untenable. As said earlier the respondents have failed to make a case of unclean hands of the petitioners. In this regard the CLB's finding as given below deserves to be mentioned. "It was forcefully argued by the learned Counsel for the respondents, that in view of the decision of the Supreme Court in Bagree Cereals case that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds and that such winding up would be prejudicial to them and also the company, no relief can be granted in these petitions as the petitioners have not so established. In this connection, it has become necessary to examine the provisions of Section 397(2). It reads "If on any application under Sub-section (1), the Company Law Board is of the opinion - (a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members: and (b) that to wind up the company would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up ". A careful analysis of the above would indicate that it is for this Board to form an opinion that the affairs of the company are being conducted in an oppressive manner and once it forms such an opinion, the just and equitable grounds for winding up of the company become established and this Board has to grant relief in terms of Section 402, if it again forms an opinion that such winding up would prejudicially affect the interest of the members/company. In other words, once this Board gives a finding that acts of oppression have been established, winding up of the company on just and equitable grounds becomes automatic. Shri Sarkar relevantly referred to the unreported judgment of Delhi Court in Prentice Hall case, wherein, the Court has held that once oppression is established, reliefs under Section 402 could be granted." In the present case the petitioners have succeeded in establishing a case that the affairs of the company are being conducted in an oppressive manner and that there is mismanagement as well, hence winding up of the company on just and equitable grounds becomes automatic in this case. But, however, winding up would be prejudicial to the petitioners' interests safeguard of which had been prayed for in this petition. Thus, the preliminary objections raised in this petition when considered in the backdrop of totality of the circumstances, cannot be maintained to throw the petition at the threshold itself.
20. Considering the case on merits, in the backdrop of facts and circumstances of this case, I find that the petitioners' contention that the appointment of R-3 and R-4 as additional directors was in the series of continuous acts of oppression to create a new majority in an illegal manner without compliance with the provisions of the Act is correct. Circumstances did not warrant expansion as the company is not carrying on any regular business actively and has become in operational for quite some time. Furthermore, the petitioners have succeeded in establishing that no Board Meetings in this regard has actually taken place and there has been no compliance with the provisions of Section 286 of the Act. I find that the respondents have not been able to refute the petitioenrs' contentions in this regard. The respondents contention in this regard that the appointment is legal and valid because Form No. 32 has also been filed with the ROC and the petitioners cannot deny their legal and valid appointment at this belated stage has no merit. As pointed out earlier, the petitioners have filed handwriting expert's report to substantiate their contention that P-1's signature on Form No. 32 have been forged. Furthermore, the petitioners have correctly pointed out various defects and discrepancies in the handwriting expert's report which the respondents' have furnished to give credence to their contentions in this regard. On considering these contentions, I find that the petitioners are on a sound ground as by simply fabricating documents and filing the same with the ROC and getting a certified copy thereof cannot change the chronology of events and give a stamp of genuineness to false and fabricated documents. Furthermore, as regards the petitioners' contentions regarding illegal and unauthorised sale of Flat No. 105, Golf Apartments, Sujjan Singh Park, Lodhi Road, New Delhi to R-5 (wife of R-8), and R-6 for inadequate consideration of Rs. 25 lakhs which in turn has been repaid to R-7, 8 and 9, the respondents have failed to refute the allegations made in this regard. I find that the petitioners' contentions in this regard are correct and tenable. There was no authorization by the Board of Directors or shareholders to sell off this asset of the respondent No. 1 company, the provisions of Section 293(1)(a) have not been complied with, consideration of Rs. 25 lacs for this flat also appears to be inadequate, the transactions are within the family members of R-2 who has signed the sale documents on behalf of the company without any authority, thus indulging in this sham transaction whereby sale consideration was deposited in the bank on 8.7.2005 and was withdrawn on the same day. In this case I notice that the respondents have breached their fiduciary duties as directors. On the role of Directors, the law is well settled. In some respects, Directors resemble trustees. Equity prohibits a trustee from making any profit by his management, directly or indirectly. It is objectionable to use such power simply or solely for the benefit of directors or merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. Directors are required to act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. Selling off the R-1's asset at the back of the petitioners is not only an act of oppression and mismanagement but also a serious breach of fiduciary capacity within which the Directors have to conduct the affairs of the company, as well as this act has been prejudicial to the interest of the R-1 and hence deserves to be set aside and inadequate consideration brought back into the account of the R-1.
21. Further, my attention was drawn to the fact by the petitioners that the two bank accounts of the respondent company were being operated singly by petitioners 1 and 2 and R-2 since inception until recently. The petitioners have now found that the respondents have fabricated and manipulated certain resolutions changing the authorised signatories for operations allegedly withdrawing the authority earlier given to the petitioners No. 1 and 2. Therefore, it was argued that it is imperative that the Respondent Nos. 12 and 13 be restricted to take cognizance of such resolutions. The respondents have maintained strong silence on this issue.
22. The respondents have been oppressive to the petitioners by appointing R-3 and R-4 as directors. Creating new majority by way of representation on Board of the R-1 and selling off the asset of the R-1 at the back of the petitioners are acts of continuous oppression to the petitioners as well as mismanagement of the affairs of the R-1 company. The respondents' conduct has been burdensome, harsh and wrongful. Besides, the affairs of the company have been mismanaged as pointed out above.
23. Keeping these circumstances in view, to do substantial justice between the parties, I hereby order as follows:
i. Appointment of the Respondent Nos. 3 and 4 as Additional Directors is declared null and void and status quo ante is restored. Form No. 32 filed with the ROC in respect of the appointment of R-3 and R-4 is also declared as null and void.
ii. The agreement to sell and purchase dated 7.7.2005 and execution of the same by R-2 on behalf of the respondent company is declared null and void and the respondent Nos. 2 to 6 are restrained from entering into any mutation of flat in favour of a third party.
iii. The respondent Nos. 2,3, 7,8 and 9 are directed to refund the amount drawn by them illegally from the company's bank account.
iv. The resolution given to Respondent Nos. 12 and 13 bankers for change in authorised signatories is hereby cancelled and declared as null and void and status quo ante is restored.
v. The R-1 company is directed to give consequential effects in implementing the directions contained in (i) to (iv) above forthwith.
24. With the above directions, the Company Petition 71/05 stands allowed. All interim orders stand vacated. All CAs stand disposed of. No order as to cost