Company Law Board
Shri Sanjay Paliwal And Shri J.K. ... vs Paliwal Hotels Pvt. Ltd. And Ors. on 31 May, 2007
Equivalent citations: [2008]141COMPCAS270(CLB), [2008]84SCL329(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering the Company Petition No. 78 of 2005 filed by Shri Sanjay Paliwal and Shri J.K. Paliwal against the respondents, particularly Shri Ajay Paliwal (the R-3), S/o Shri J.K. Paliwal alleging certain acts of oppression and mismanagement in the affairs of the R-1. The CP has been filed under Sections 397, 398 of the Companies Act, 1956 (hereinafter referred to as 'the Act').
2. The undisputed facts of the case are: The respondent company, namely M/s Paliwal Hotels Pvt. Ltd. was incorporated on 11.10.1985 with its registered office at Alpana Cinema Building, Model Town, Delhi with the main object of carrying on the business to construct, carry out, maintain, improve, manage, work, control and superintend hotels, buildings, roadways, railways bridges, dams, barrages, aqueducts, shops and other works and conveniences; to purchase, take on lease or tenancy or in exchange hire, renew, otherwise acquire and hold any estates or interests and to let or sublet in whole of in part, develop, manage and exploit any lands, buildings, machinery, plant and any real and personal property of any kind; to carry on fabrication jobs such as trusses, purlins, columns, frames and other structurals. The authorised share capital of the company was Rs. 25,00,000/- comprising 25000 equity shares of Rs. 100/-each. The petitioners hold 12250 shares working out to 61.25% of the paid up share capital of the R-1 company.
3. Shri Virender Ganda, the counsel for the petitioners alleged that the appointment of R-4,5 and 6 as directors was made on Dec.1, 2004 w.e.f. 1.3.2005 without complying with the provisions of law; it aims at creating new majority in the Board of Directors; the petitioners admittedly hold more than 60% of the equity shares and, therefore, it was unlikely for them to allow the appointment of Directors as alleged; the appointment deserves to be set aside.
4. As regards the removal of P-1 as Director, Shri Ganda contended that Sections 190 and 284 of the Act were not complied with; the petitioners admittedly hold more than 60% of the equity shares and, therefore, it was unlikely for them to have allowed the removal of their representatives; AGM for appointment/removal was not actually convened for the reasons that (i) the respondents were themselves not sure as to the date of AGM i.e. 13.5.2005 or 30.5.2005; (ii) as per averment of the R-2 and 4, formal notice was not sent and was held by an oral communication (para 16(ii) page 21 of R-2 reply was referred to); (iii) as per the R-3 the notice was sent by ordinary post to Directors only and the respondents are silent about sending the notice to the shareholders (para 16(ii) page 17 of R-3's reply was referred to); (iv) the reasons mentioned by R-2 and 4 in their reply that the P-1 had advanced a loan of Rs. 64.50 lakhs to his relatives does not find place in the AGM notice (pages 77-79 of petition were referred to) and, therefore, it is an afterthought; (v) 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 (vi) there is no mention of appointment/removal of directors in the Director's Report (page 80-81 of petition were referred to).
5. Shri Ganda further argued that the respondents have manipulated allotment of shares to themselves, particularly R-3 and reliance is being placed heavily on certified copy of Form No. 2 (at pages 39 and 40 of R-3's reply), return in Form No. 2 patently incorrect as the date of allotment on page 39 (1.12.2004) and 40(1.9.2004) are different; the number of shares allotted to Mrs. Kamlesh Paliwal as per Para 14(b) of R-3's reply does not match with the said certified return of allotment (page 40 of R-3's reply); as per the admitted shareholding pattern appearing at page 8 and 9 of the petition, the petitioners are holding shares more than 60% of the total Share Capital. The Petitioners claim that on 1st Dec. 2004, 4800 equity shares were allotted as per Para 9 of the petition. The alleged allotment of 550 shares on 1.12.2004 and 4250 Equity Shares on 3rd Feb.2005 as claimed by the Respondents, is not a valid allotment and deserves to be set aside in view of the fact that the said allotment of shares amounts to creation of new majority and the same being an act of Oppression is illegal.
6. Further, the counsel for the petitioners argued that the Annual return dated 30.9.2005 (as per page 93 of the petition) clearly indicates the forgery showing the changes made in the shareholding of Mr. J.K. Paliwal, P-2 (from 5100 to 0100) and of Mr. Ajay Kumar Paliwal, R-3's (from 3255 to 8255) both in words and figures; the transferees are indicated as R-3 and R-5 in para 21, page 24 and 25 of R-3's reply, whereas the share transfer deed as produced and the Annual Return shows the transferee as R-3 only; no share transfer deed was produced till May 31,2006 despite repeated insistence by the petitioners; no original share transfer deed has been produced till date; so called certified true copy of share transfer deed by Notary Public which produced across the Board was without any index or supporting affidavit. It suffered from several defects; (i) signatures of petitioner No. 2 are materially different and apparently forged; (ii) there is overwriting on the date of execution and the value of share transfer stamps, (iii) stamp duty was not paid as per law and (iv) there is no endorsement on behalf of the company on the share transfer deed approving or rejecting the share transfer.
7. Further, the counsel for the petitioners' contended that the entries dated February 1,2005 in the pass book produced, to prove receipt of sale consideration for shares, have not been explained with reference to the entries dated 28.10.2004; the entries of 1999 have no relevance to the entries of Oct 28, 2004; a letter dated 7.3.2005 of Bhagwati Castings P. Ltd. Calcutta addressed to P-2 of Muzaffarnagar acknowledging a receipt of cheques dated 7.3.2005 has not been explained as to how the letter reached the same day from Calcutta to Muzaffarnagar; no justification/explanation has been given for arriving at the amount of consideration vis-a-vis valuation of shares.
8. Shri Ganda further argued that the Annual Accounts for the year ended March 31, 2005 filed with the Registrar of Companies had been prepared without the books of accounts, as upto Feb. 28, 2005 the books of accounts were in the petitioners' possession.
9. Further, regarding the petitioners' case on siphoning off of funds, by the respondent the counsel argued that the details of Receipts and Payments furnished by the Respondents, it reveal that the Respondents have siphoned off sums to the order of more than Rs. 40 lacs approximately from April, 2005 till date. My attention was drawn to the details given in a statement at page No. 46 of the compilation submitted during hearing on 19th January, 2006, as under:
Particulars Rs./Lacs
a) Income from Restaurants Apr. 2005 to Feb.2006
(Rs.50,000 per month) 5.50
b) Expenses on family function 5.50
c) Cash withdrawn from Bank 3.80
d) Directors Remuneration 4.00
e) Payment made to M/s Bhai Sahib 2.00
f) Payment made to M/s Advocate/Auditors 2.00
g) Purchase of Skoda Car(Down Payment:Rs.2.90 14.00
Balance as Loan: Rs. 1.10)
h) Others (approximately) 3.70
Total 40.50
It was pointed out that -
i) The explanation from Respondent No. 2 and 4 (which is without any reply/document from Respondent No. 1, Company or Respondent No. 3 on record) cannot be relied upon.
ii) Respondent No. 2 and 4 have said that Respondent No. 1 had given the Restaurant on contract to an ex-employee. There is no reply or statement or affidavit from Respondent No. 1 (Company) to this effect.
iii) The expenses on a private function have allegedly been incurred by Respondent No. 3 and charged to Respondent No. 1. There is no reply/document/affidavit on record from Respondent No. 3.
iv) The explanation given by Respondent No. 2 and 4 cannot be relied upon and that there is no reply from any of the respondents till date leading to the admission of siphoning off funds.
10. Shri Virender Ganda, Counsel for the petitioners while replying to the respondents' contention regarding defects in verification of this petition pointed out that the contention has been raised without any averment/statement made by any of them in any of the pleadings. The objections have, however, been rectified by filing a supplementary affidavit. Reliance was placed upon the judgment by the apex court in Associated Journals Ltd. v. Mysore Paper Mills Ltd. 2006 VI AD (SC) 470 Civil Appeal No. 183 of 2000.
11. Shri V.N. Sharma, Counsel for the R-1, 2,4 and 5 argued that the present petition under Section 397/398 of the Act, 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 which are just and equitable and the winding up would prejudice the petitioners. On the contrary, it was argued, that the turnover of the company has been on the increase from the day the respondents have taken charge of the company and within a span of less than two years the turnover is expected to be Rs. 45 lakhs from Rs. 28 lakhs. It was pointed out that the profit is also likely to increase this year.
12. Shri Sharma contended that there has been no manipulation or siphoning off of funds of the company as alleged and the reasons have been explained in detail in reply to the application No. 302/2005. The action of giving canteen on lease has, in fact, helped in the increase of turnover of the company. Only 1.50 lakhs has been spent on business promotion and, it was pointed out, that the same has nothing to do with the expenses of marriage party of respondent No. 3's sister's son. The business promotion expenses which have been started from the last year only have given good results in the increase of the business of the company. Further, it was contended that the assertions of allotment of 4800 shares and appointment of additional directors in the meeting held on 1.12.2004 are false and can be got verified from the records of the R.O.C. It was pointed out that Form No. 2 dated 3.2.2005 filed on 4.2.2005 regarding allotment of 4250 equity shares is part of the ROC's record. Further, it was contended that the petitioners' assertions regarding being in possession of Accounts Books up to Feb. 2005 is also a false story as no books whatsoever have been produced before the CLB. On the other hand, it was pointed out, that on the application moved by the respondents to inspect the statutory books which were in the possession of the petitioners, the petitioners' reply was that the entire Statutory and other records were available at the Registered Office of the company till dispute arose, and on receipt of the application for inspection the premises were searched and the records were found missing. Further, it was pointed out that even at the time of inspection of the records of the other company i.e. Paliwal Steels Limited under the CLB's orders dated 13.9.2005 statutory Books only up to 1999 were made available to the respondents and allegations were made that other books have been removed by the respondents. The fact is, it was stated, that the statutory Books are in possession of the petitioners and just to protect their misdeeds the same are not being shown to the respondents and to the CLB.
13. Responding to the allegation of illegal removal of the P-1 as director of the company, it was contended that the said director was legally removed from the post after complying with the due procedure usually adopted by the company for the said purpose. It was pointed out that the company as per its own practice, evolved for its business affairs and administration thereof never issued any notices for calling board meeting through postal circulation and, accordingly, on the occasion of removal of above named petitioner from the post of directorship of the company no notice through postal means was circulated. However, this factum is duly recorded amidst the contents of minutes of the Board meeting.
14. Further, it was contended that the petitioners have acted to mar the interest of the company, its creditors, shareholders and members besides the General Public at large for the reasons that the petitioners as per their own case have transferred an amount of Rs. 64,50,000/- in favour of his nearest relatives (his brother-in-law, sisters and mother-in-law of petitioner No. 1). This unlawful transfer of funds of the company, it was argued, has never been explained by the petitioners and it is startling that now the above said relations of petitioner No. 1 have willfully refused to confirm the transfer of aforesaid quantum of money in their favour.
15. Shri Sharma further argued that an amount of Rs. 5,00,000/- was paid by respondent No. 3 to petitioner No. 2 for transfer of 5000 shares from the petitioner No. 2 to respondent No. 3 and the transaction of aforesaid payment by the said person to petitioner No. 2 has been duly recorded in statutory books of the company for which share transfer form, as required under the law, was duly signed by the petitioner No. 2 but about the aforesaid transaction no documentary evidence could be produced because other statutory books of the company have been willfully and deliberately removed by the petitioners from the company and the same are not within the reach of the respondents.
16. Shri U.K. Chaudhary, Counsel for the R-3 contended 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. It was contended that the affidavits filed by the petitioner in support of the petition are invalid, irregular and are liable to be ignored and the present petition is liable to be dismissed on this ground alone. Even the supplementary affidavits filed subsequently are also invalid, irregular and are liable to be ignored. It was argued -
i. The affidavits filed along with the petition are not in accordance with the Company Law Board Regulations, 1991, the paragraph of the petition which are on the basis of records, on the basis of knowledge and belief and which are on the basis of advice of the counsel, are in clear violation of the Regulation 14 (5), (6), (7) & (8);
ii. The affidavit along with the petition has shown the petitioners as resident of Uttar Pradesh, however, the affidavits have been purchased and sworn-in in Delhi and since the deponents signing the affidavits are residents of Uttar Pradesh it is presumed that the said affidavits have been signed in Uttar Pradesh and not in Delhi.
iii. Further, the supplementary affidavits verifying the petition are liable to be ignored as the same have not been filed with the permission of the CLB and cannot be taken on record. Further, it is a settled law that once the affidavits have been found to be defective, then in such a case the filing of the subsequent affidavits cannot cure the defect and the petition is liable to be dismissed. Therefore, in the above facts and circumstances the present petition is liable to be dismissed on this ground alone;
iv. Otherwise also the supplementary affidavits are liable to be ignored as they also suffer from various discrepancies. It was pointed out that the stamp papers for filing the supplementary affidavits have also been purchased and sworn-in in Delhi. However, the deponents signing the affidavits are residents of Uttar Pradesh and it is presumed that the said affidavits have been signed in Uttar Pradesh and not in Delhi. It was pointed out that if the said affidavits have been signed in Uttar Pradesh, then the stamp paper could not have been purchased in Delhi and similarly the affidavits could not have been sworn-in in Delhi. Thus the affidavits are invalid. Further, the affidavits also do not state that the deponents are present in Delhi at the time of signing of the affidavits.
v. The supplementary affidavits filed on 06.10.2006 suffer from various discrepancies as the same is also not in consonance with the Company Law Board Regulations, 1991, that the petitioner's reliance upon the judgment of Hon'ble Supreme Court in filing of the fresh affidavits in support of the petition in the matter of Associated Journals Limited. v. Mysore Paper Mills Limited 2006 VI AD (SC) 470 is not applicable in the present case, Firstly the above observations have been passed by the apex court in the facts and circumstances of the above case and no law has been laid down by the apex court. Secondly, in the above case specific permission was granted by the Hon'ble High Court, however, in the present case no application seeking permission to file fresh affidavits was filed by the petitioners. On the contrary the petitioners have filed the above affidavits only when a preliminary objection was raised by the respondents at the time of arguments. Therefore, it was argued, the above judgment is not applicable in the present case and the petitioners have misconstrued the above judgment, which in the facts and circumstances of the case is liable to be ignored. Therefore, it was reiterated that the affidavits filed along with the petition and the supplementary affidavits filed along with the short affidavit are invalid, irregular and are liable to be ignored and the petition is liable to be dismissed on this preliminary ground alone.
17. Further, it was contended that even the consent letters filed along with the petition are invalid as the same are not in accordance with law. It was pointed out that the consent letters are similar and have been signed without application of mind. Further, the consent letters bear a different title of the case, wherein, the title shows as JK Paliwal and Ors. v. Paliwal Hotels Private Limited, wherein the present case title is Sanjay Paliwal and Ors. v. Paliwal Hotels Private Limited and Ors.. Therefore, even the consent letters are irregular and invalid and are nullity in the eyes of law and the present petition is liable to be dismissed on this ground alone.
18. Shri Chaudhary argued that the petitioners are guilty of suppression of material facts from the CLB. It was pointed out that the petitioners have filed the Memorandum & Articles of Association of the respondent No. 1 company. However, the petitioners have deliberately omitted/ concealed the Article 6 relating to the Board of Directors of the Company for the reasons best known to them. However, it is presumed that the said article has been omitted/concealed due to the fact that since the petitioners were very well aware that the additional directors appointed by the respondent No. 1 company are in consonance with the Articles of Association and they cannot challenge the appointment on the ground that the said appointment are in violation of the Articles of Association. The respondents have subsequently filed the correct affidavit duly certified by the Registrar of Companies to show the correct articles of association of the respondent No. 1 company. Therefore, the petitioners are guilty of suppression and are not entitled to seek any equitable relief from this Hon'ble Board and the present petition is liable to be dismissed on this ground alone.
19. Raising further preliminary objections, Shri Chaudhary argued that the petitioners have filed the present petition, interalia, seeking various reliefs under equitable jurisdiction of this Hon'ble Board. However, the conduct of the petitioners disentitles them from seeking any relief from this Hon'ble Board, petitioner No. 1 has at several times acted against the interest of the respondent No. 1 company, as per his own will on his own has transferred an amount of Rs. 64,50,000/- in favour of his nearest relatives (his brother-in-law, sisters and mother-in-law of petitioner No. 1). This unlawful transfer of funds of the company, it was pointed out, has never been explained by the petitioners and it is startling that now the above said relations of petitioner No. 1 have even willfully refused to confirm the transfer of aforesaid quantum of money in their favour.
20. Further, pointing to the petitioners conduct in another Company Petition being CP No. 71 /2005 in another family company namely Paliwal Steels Pvt. Limited, it was contended that the petitioners in the said company have illegally transferred the land of the company by way of lease in favour of his brother- in-law and mother-in-law without knowledge and concurrence of the respondents. Further, it was pointed out that a contempt petition is also pending against the petitioners for violation of the orders passed by this Hon'ble Board as the petitioners have without the knowledge of the respondents and this Hon'ble Board illegally opened a new Bank account of the respondent company and have made several bank transactions. The said new account has been frozen by this Hon'ble Board. 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 is submitted that the it has been held by the 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, 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 in to the merits of the case.
21. Coming to the arguments on merits, Shri Chaudhary pointed out that the petitioners are guilty of forgery of various documents filed before this Hon'ble Board. The allotment of shares and appointment of directors is valid because (i) it is an admitted case of the petitioners that their was a Board Meeting of the respondent No. 1 company on 01.12.2004, however, the petitioners have shown an allotment of 4800 shares and appointment of additional directors of their group on 01.12.2004, the petitioners have filed a form 32 and form 2 for the decisions taken on 01.12.2004 along with the receipt of filing with the Registrar of Companies, on the other hand the respondent No. 3 has also filed the form 32 for the appointment of additional directors and form 2 for the allotment of 550 shares on 1.12.04, the copies of forms filed by the respondents are the certified copies of the correct Form 32 and Form 2 as obtained from the Registrar of Companies and a bare perusal of the forms clearly shows that the forms filed by the respondents are the correct forms and there is no form filed by the petitioners. Further, it was argued that it is evident from the various forms in question that the receipt attached by the petitioners being receipt No. 606762 along with the forms filed by them and the receipt attached by the respondents bearing No. 606762 on the certified copies of the forms filed by the respondent is the same. It was pointed out that though it is possible that various forms can be filed on the same date. However, their can never be same receipt issued by the Registrar of Companies for the same form. Therefore, the forms filed by the petitioners are false and fabricated and the petitioners have merely attached the receipt issued by the Registrar of Companies on the forms filed by the respondents, (ii) Further, regarding the validity of the decisions taken on 01.12.2004, it was argued that the two out of three directors have stated that the decisions taken and subsequent forms filed by the respondent on 01.12.2004 & 3.12.2004 respectively are correct and there are no decisions taken as allegedly stated by the petitioners. Further, it was pointed out that the petitioners were fully aware of the decisions taken by the respondent company. However, the petitioners with malafide intention and to defraud the respondents intentionally filed the said Form 2 & 32 with the Registrar of Companies on 13.12.2004 in order to create a dispute in the respondent company. Therefore, it was argued, the allotment of 550 shares and appointment of three additional directors shown by the respondent is valid and the petitioners are guilty of forgery and are not entitled to any relief from this Hon'ble Board and the petition is liable to be dismissed on this ground alone.
22. The counsel for the respondents further argued that the transfer of 5000 shares by the petitioner No. 2 (J.K. Paliwal) in favour of his son Ajay Paliwal (respondent No. 3) is valid in the eyes of law. It was pointed out that the transfer was made with due knowledge & concurrence of the petitioners and all the mandatory provisions in relation of transfer of shares were followed by the company. The transfer of shares is valid because, (a) Consideration of Rs. 5 lac for transfer of shares was paid by the respondent No. 3 to petitioner No. 2, the amount of Rs. 5 lac paid is evident from the pass book of the petitioner No. 2, wherein the consideration amount of Rs. 5 lac is duly reflected in the pass book. (averments at page 6-7 para 13 and also at page 24-25 para 21 and pass book of petitioner No. 2 at page 32-34 of reply of respondent No. 3 refer). Further, the said money was thereafter utilized by the petitioner no. 2 by way of an investment in Bhagwati Castings Private Limited. Kolkata. (averments at page 6-7 & letter from Bhagwati Castings at page 35 of the reply of respondent No. 3 refer); (b) Transfer deed was duly signed and executed by the petitioner No. 2 in favour of respondent No. 3 and all formalities for transfer including signatures, witnesses, date and stamp duty were duly completed; (c) Board of Directors of the Company duly considered the transfer of shares and confirmed the said transfer; (d) The respondents in order to verify the authenticity of signatures of the petitioner No. 2 on the transfer deed have obtained an opinion dated 11.9.2006 of handwriting expert namely Mrs. R.K. Vig by showing the signatures of Mr. J.K. Paliwal on transfer deed and also on the affidavit of company petition No. 78/2005 and also on various other documents. On comparison of the documents the handwriting expert in her opinion has clearly stated that the signatures on the transfer deed are that of Mr. J.K. Paliwal only and there is no forgery on the various documents signed by Mr. JK Paliwal. Further, the report given by Mr Ashok Kashyap filed along with the petition and also the subsequent report is a qualified report as the said examination is based on the xerox copy and not on the basis of the original as the evidence from the report itself and same cannot be relied upon by this Hon'ble Board; (e) The petitioners have also argued that the pass book of the petitioner No. 2, filed along with the reply to the petition shows several transactions with the respondent No. 3 including entries of October 2004 of Rs. 10 lac. It was pointed out that the said amount was returned by the petitioner No. 2 to respondent No. 3 for amount taken by him (petitioner No. 2) from respondent No. 3 in the year 1999. The said amount was given by the respondent No. 3 to petitioner No. 2 in the year 1999, when the petitioner No. 2 entered into a partnership in one Swastik Air Product in 1999 and the said amount was paid as a loan to petitioner No. 2. The said entry of Rs. 10 lac is only the amount paid back by the petitioner No. 2 to respondent No. 3. Referring to the petitioners argument that the sum of Rs. 5 lac and 10 lac was paid by the petitioner No. 2 to respondent No. 3 for some other purpose, however, till date the petitioners have failed to show that for what purpose the said money came into the account of the petitioner No. 2 and assuming the said money was a loan than why till date the petitioners had not paid back the said amount. Therefore, it was argued that there is no merit in the above argument of the petitioners and the same is liable to be ignored and thus the transfer of 5000 shares is legal and valid in the eyes of law.
23. Further, Shri Chaudhary argued that the Petitioner has also challenged the allotment of 4250 equity shares on 03.02.2005 in favour of Respondent No. 3 and 7. It was pointed out that the said allotment was made by complying with all the provisions of the Act, Form 2 for allotment of shares was duly filed on the very next day i.e. 04.02.2005 with the Registrar of Companies, further, the said resolution for allotment of shares was also approved by the Board of Directors and the consideration of Rs. 4,25,000 was received from the Respondent No. 3 and 7 respectively in the Respondent No. 1 Company. In this regard my attention was drawn to a copy of the Bank Statement of Respondent No. 1 Company from 01.04.2004 to 31.3.2005. Further, it was argued by Shri Chaudhary that on the contrary no consideration money for allotment of shares on 01.12.2004 by the petitioner to their group came into the company. Therefore, it was argued that it does not lie in the mouth of the Petitioner to state that the allotment of 4250 shares on 03.02.2005 was invalid.
24. Further, the counsel for the respondents pointed out that the assertions regarding being in possession of the Accounts Books up to Feb, 2005 is also a false story as no books whatsoever have been produced before this Hon'ble Board. On the other hand on the application moved by the respondents to inspect the statutory books which were in the possession of the Petitioners, the petitioners reply was that the entire Statutory and other records were available at the Registered office of the company till the dispute arose and on receipt of the application for inspection the premises was searched and the record was found missing. It was pointed out that even at the time of inspection of the records of the other company i.e. Paliwal Steels Limited CP 71/2005 under the orders dated 13.9.2005 of this Hon'ble Board statutory Books only up to 1999 were made available to the respondents and allegations were made that other books have been removed by the respondents. It was stressed that the petitioners should have been more vigilant in protecting the Books of the company especially when they were aware that the other party is equally in access of the books. The fact is, it was pointed out, that the statutory Books are in possession of the petitioners and just to protect their misdeeds the same are not being shown to the respondents and to this Hon'ble Board.
25. Regarding the removal of Shri Sanjay Paliwal the P-1 from the post of directorship of the company, it was pointed out that the said director was legally removed from the post after complying with the due procedure usually adopted by the company for the said purpose. It was argued that the provisions of Section 190 and 284 of the Act were duly followed by the Company. Further, the Form 32 of removal of Petitioner No. 1 was filed with the Registrar of Companies on 3.6.2005. Further, the Share holders meeting was duly held and accordingly petitioner No. 1 (Sanjay Paliwal) was removed from the said post of the Respondent Company because the act and conduct of petitioner No. 1 was fatal/ detrimental to the interest of the Company, its shareholders/ members, directors and creditors for the reasons that petitioner No. 1 filed form No. 2, 32 without the consent and approval of the Board. Apart from the above obnoxious approach of the petitioner No. 1 towards the welfare of the company may be seen by virtue of existing facts that the petitioner No. 1 gave Rs. 64,50,000/- to his near relatives as advance against the alleged supply for the last so many years. My attention was drawn to the contents of balance sheet at page 84 of the paper book. On the question of refund of aforesaid quantum of money petitioner No. 1, it was argued, had mischievously and malignantly kept silent with intention only to ruin the business of the Company as he (Petitioner No. 1) failed to give any particulars of transaction allegedly transacted by Vijay Laxmi and Sheshdhar Pandey to whom the aforesaid amount of money was advanced without fetching any interest thereon though on the contrary the respondent company has taken loan of Rs. 90 lacs from Directors, relatives and share holders. Further, the petitioner No. 1 had also manipulated the bank operations of the respondent No. 1 company. Therefore, it was argued, the removal of Petitioner No. 1 as a Director was legal and valid.
26. Considering the facts and circumstances of the case as well as the pleadings and the documents filed therewith I find that the petitioners' case is that the R-4,5 and 6 were appointed Directors on 1.12.2004 without compliance with the provisions of the Act with an oblique motive of reducing the majority shareholders representation on the Board to acquire control on the affairs of the R-1; illegal removal of the P-1 as a director representing majority shareholders holding more than 60% shares without holding any AGM (the respondents themselves are not sure about the date of the AGM) no formal notice having been sent, reason for removal being shown as advancing of loan to relatives in the year 2002 with the consent of the then Directors and the same having been consistently reflected in the Annual Accounts signed by the respondents upto 2003-2004, no mentioning of this reason in the impugned notice for the AGM, no mention of this reason in the Directors' Report; on 1.12.2004 as per para 9 of the petition 4800 equity shares were allotted and not 550 shares on 1.12.2004 and 4250 shares on 3.2.2005 as claimed by the respondents, Return filed with the ROC being patently incorrect containing discrepancies and contradictions; Annual Return dated 30.9.2005 has been forged changing P-2's shareholding from 5100 to 0100, and of R-3's shareholding from 3255 to 8255 both in words and figures, no original transfer deeds in respect of alleged transfer of 5000 shares of P-2 to R-3 produced till hearing of the petition despite insistence for production of the same, signatures of P-2 being materially different having been apparently forged handwriting expert's report obtained by the respondents is defective, petitioners also have handwriting expert's report, contains over writings, discrepancies, and contradictions; certain entries in the R-1's account have not been explained; the Annual Accounts filed with the ROC for the year ending 31.3.2005 filed with the ROC were prepared without the account books as the same upto the period 28.2.2005 were admittedly in the possession of the petitioners; the respondents have not been able to rebut the allegation regarding siphoning off of funds (approximately amounting to Rs. 40 lakhs from April 2005 till hearing of the petition, creation of new majority is illegal and oppressive; case of mismanagement in the affairs of the company is made out; case of winding up of the R-1 on just and equitable grounds is made out; there is no delay in filing of this petition; the petitioners have not come with unclean hands including in respect of proceedings in CP No. 71/05; and technical defaults in filing the petition stand removed. The respondents case is that the petition is not maintainable as the affidavits filed with the petitioners in support of the petition are invalid, irregular, liable to be ignored and the present petition is liable to be dismissed on this ground alone as the affidavits are not in accordance with the CLB Regulations, 1991; the petitioners are shown as residents of U.P., the affidavits are purchased and sworn-in in Delhi; supplementary affidavits filed subsequently also cannot be considered as the same have been filed without permission from the CLB, and the supplementary affidavits also suffer from various defects and discrepancies and are not in accordance with the CLB Regulations, 1991; further, the consent letters filed by the petitioners for filing the petition are irregular, invalid as have been signed without application of mind, are similar and hence nullity in the eyes of law; furthermore, the petitioners have not come with clean hands, they have suppressed material facts, have deliberately omitted Article 6 from the Articles of Association, they have several times acted against the interest of the R-1 - 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; on merits, the respondents' case is that the Board Meeting on 1.12.04 is admitted by the petitioners, R-4,5 and 6 have been validly appointed, Form No. 32 produced by the respondents before the CLB is a certified copy from the ROC whereas what the petitioners have produced is not certified, the same receipt No. 606762 has been used by the petitioners to show a false and fabricated form, out of the three the two directors confirm the decisions as correct, the petitioners are fully aware of the decisions taken whereas allegedly there are no decisions taken by the petitioners on 1.12.2004, the petitioners have committed fraud, have filed form No. 32 and 2 with the ROC; transfer of 5000 shares by father (P-2) to son (R-3) is for consideration and with due knowledge and concurrence of the petitioner, there are entries in the pass book for consideration received, there is a handwriting expert's report to prove that P-2's signatures are not forged; allotment of shares to R-3 and 7 on 3.2.2005 was in accordance with the provisions of the Act, and the ROC was duly informed; removal of P-1 as director was as per the provisions of Sections 190 and 284 of the Act, Form No. 32 was filed in the ROC on 3.6.2005; removal was due to P-1's acting against the R-1's interest, he had transferred an amount of Rs. 64,50,000 to his relatives; the statutory books are in possession of the petitioners and being suppressed from the respondents and the CLB, and that no case of oppression and mismanagement is made out by the petitioners.
27. There are allegations and counter allegations in this petition. Father (P-2) has turned against his son (R-3). However, the preliminary objections raised in this petition, when considered in the back drop of totality of the circumstances, cannot be maintained to throw the petition at the threshold itself. The technical objections enumerated above in respect of the affidavits filed with the petition, which defects have been made good now, and the consent letters of the petitioners (their shareholding has not been denied by the respondents, the shareholders have not objected to or denied the consent letters) when pitted against substantial justice, cannot be given preference. As regards the conduct of the petitioners in the proceedings in this petition as well as in CP No. 71/05 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. In this petition R-1 had not chosen to file its counter initially. For the first time Shri Sharma indicated that he was to represent R-1 also (when the petitioners had raised an objection to the R-1's paying fee to the counsel without him representing the R-1 in this petition) on 19.1.2006 whereas the hearing had commenced as early as on 13.10.2005, R-3 also chose not to file reply to the CP and enter appearance till 16.5.2006 on which date (though the final arguments on the CP had already commenced) leave was sought to enter appearance, the same was allowed to do substantial justice between the parties keeping in view the principles of natural justice. 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 other proceedings i.e. in CP No. 71/05, I have heard that petition wherein the petitioners had 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 has received due consideration in CP No. 71/05 being disposed separately on the same date. 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 in CP No. 71/05 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 contention that the petitioners directorial complaints cannot be entertained in a petition under Section 397/398 of the Act, the respondents are very well aware that it is a composite company petition wherein several continuous acts of oppression and mismanagement have been alleged. Allegation regarding directorial removal is only one of such allegations, making of this directorial complaint in this petition cannot disentitle the petitioners from attracting the provisions of Sections 397 and 398 of the Act. As regards the respondents' contention that the petitioners reliance on the CLB's decision in Giridhar Gopal Dalmia's Case (Supra) is misplaced as in this case the petitioners have not come with clean hands and hence there is no just and equitable ground for winding up of the company, 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 (I), the Company Law Board is of the opinion - (a) that the company's affairs are being conducted in a manner prejudicial to public interst 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 if 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.
28. As I said there are allegations and counter allegations in this case, the petitioners have also complained of the unclean hands of the respondents in other proceedings in CP No. 71/05 against M/s Paliwal Steels Ltd. alleging that the respondents have transferred Flat No. 105 in Golf Apartment for allegedly inadequate consideration at the back of the petitioners. 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 the backdrop of such circumstances of distrust and lack of confidence between the parties, the petitioners omission of Article 6 from the Articles of Association is not sufficient to throw this petition at the threshold itself. There are allegations and counter allegations of fraud and forgery on the part of both the parties. Althrough the endeavour of the respondents has been to allege that the petitioners have not come with clean hands and the petition deserves to be thrown out at the threshold for even contempt of court for indulging in fraud and disobeying of CLB's orders which allegations as discussed above have not been found to be tenable.
29. Having held that the preliminary objections are not tenable, next I come to the other allegations of the petitioners on merit. I find that the respondents have not been able to refute the same. As regards the petitioners allegation of appointment of R-4,5 and 6 as Directors on 1.12.2004 without complying with the provisions of law and whereby the respondents created a new majority of which, if the petitioners were given due notice to attend the meeting were unlikely to allow the appointment of directors as the same has resulted in an oppression to the majority shareholders, the respondents contention is that the meeting on 1.12.2004 is admitted by the petitioners, the respondents have produced certified copies of Form 32 filed with the ROC whereas the socalled Form 32 produced by the petitioners is alleged to be false and fabricated making use of the same receipt number whereby the respondents had filed the socalled genuine form 32, of which the petitioners are allegedly set to be fully aware. On considering these contentions, I find the petitioners are on a sound ground as simply fabricating documents and filing with the ROC and getting a certified copy cannot change chronology of events and give a stamp of genuineness unless it is established that the appointment was done following the due procedure and law in accordance with the provisions of the Act, no evidence is given to prove that the so called meeting on 1.12.2004 was held in compliance with the provisions of the Act. The respondents contention that the two out of the three directors have confirmed the meeting is not acceptable as majority cannot turn black into white. As regards the petitioners' allegation of removal of petitioner No. 1 for the reason that a loan of Rs. 64.50 lacs was given to the relatives in the year 2002 this action also has not been justified by the respondents and the allegations stand unrefuted. The respondents contentions are not borne out from the records. The petitioners admittedly hold more than 60% shares. By removing P-1 their representation on the Board is reduced and this action is oppressive besides being irregular and illegal. It has not been in compliance with the provisions of Sections 190 and 284 of the Act. If the AGM had been held it was unlikely that P-1 would have allowed removal. The circumstances that the respondents themselves are not sure of the date of AGM whether it was 13.5.2005 or 30.5.2005 only indicate falsification and fabrication of record. Besides, the R-3 has admitted that notice was sent by ordinary post. He is silent about sending notices to the shareholders. Other respondents have admitted in their reply that formal notices were not sent only oral communication was made. Thus it is admitted position that no proper notice as per provisions of Section 284 of the Act has been given. There is obvious violation of Section 284 of the Act while removing P-1. Moreover, the fact that the reason given for removal, that the P-1 had advanced a loan of Rs. 64.50 lakhs to his relatives does not find place in the notice for the AGM only establishes that it is an afterthought. As regards advancing of loan in the year 2002, as pointed out earlier by the petitioners, the advances were given with the consent of all the directors and the respondents have been consistently signing the annual accounts which reflect these loans year after year till 2003-2004. Furthermore, there is no mention of the removal of P-1 in the Directors' Report. In these circumstances it is difficult to rely on the respondents' version and accept it as true. On the other hand P-1 has established that even subsequent to the date on which he is shown to have been removed, he has issued cheques and signed on other documents as Director.
30. As regards the shareholding of the parties there are serious allegations and counter allegations. The respondents allege that P-2 had transferred 5000 shares to R-3 (his son), the transfer is valid in the eyes of law as it was made with due knowledge and concurrence of the petitioner in accordance with mandatory provisions in relation of transfer of shares. The consideration of Rs. 5 lacs for transfer of these shares was paid by R-3 as is reflected in the bank account of P-2. On the other hand, P-2 had taken a strong objection to this pointing out that no shares were transferred by him, the respondents have failed to produce any transfer deeds in original till May 2006 despite several opportunities provided to them. However, only certified copies of transfer deeds, certified by notary public without any supporting affidavit and index were produced. These certified copies of transfer deeds suffered from various discrepancies and defects as pointed out by the petitioners in their contentions given above. Furthermore, the P-2 has alleged that his signatures have been forged on Form No. 2 wherein his shares numbering 5001 have been shown as 0100 and R-3's shareholding of 3255 shares has been shown as 8255 by fabrication of record. It is the respondent who have committed forgery by changing the shareholding by converting 5001 to 0100 and 3255 to 8255. The respondents reliance on handwriting expert's report regarding P-2's signatures which he has denied also cannot be accepted in view of the several discrepancies pointed out in the expert's report by the petitioners. There is no endorsement on the certified share transfer deeds produced before me approving or rejecting the share transfers. The petitioners' contention regarding non payment of stamp duty on the alleged transfers is also found to be correct. The respondents have not been able to relate the sale consideration as allegedly reflected in the bank pass book of P-2. The bank pass book reflects several other entries as well. Further, it is not understood as to how a letter dated 7.3.2005 of Bhagwati Castings Pvt. Ltd. Calcutta addressed to P-2 of Muzaffarnagar could reach him the same day making it probable to acknowledge a receipt of cheques dated 7.3.2005 on the same day.
31. As regards allotment of 4250 shares by the respondents for which Form No. 2 was also filed with the ROC and certified copy obtained to claim genuineness of the transaction, the petitioners contentions in this regard are found to be correct and ture No .further allotment of shares could take place without increasing the authorised share capital which stood exhausted as on that date. Besides, the Return in Form No. 2 is patently incorrect as the date of allotment on page 39 is 1.12.2004 whereas at page 40 it is 1.9.2004, further, the number of shares allotted to Mrs. Kamlesh Paliwal as per para 14 (b) of R-3's reply does not match with this certified copy of return of allotment. Besides, the petitioners' contentions in this regard cannot be dismissed as these point out that there are discrepancies in the dates of the AGM, in the number of shares and even in respect of the so called transferees of these shares.
32. Furthermore, I find that the respondents have not been able to meet the petitioners' allegations regarding siphoning off of funds approximately to the extent of Rs. 40 lacs. The allegations have been met with bald denial with a stony silence regarding specific entries. Further, the petitioners' allegations that annual accounts, statements filed with the ROC as on 30.6.2005 do not reflect the true state of affairs are also found to be correct in view of the facts that the final accounts could not be prepared in the absence of complete account books and statutory records. Account books for the part period were in the possession of the petitioners and hence the Annual Returns filed with the ROC are incorrect and null and void.
33. 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. The power to issue shares in this case has been exercised with an improper motive. 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. And in the matter of issue of additional shares, the directors owe a fiduciary duty to issue shares for a proper purpose. The respondents have been oppressive to the petitioners by appointing R-4, 5 and 6 as directors and by removing P-1 from the directorship. Creating new majority by way of representation on Board of the R-1 and by way of further share allotment and remaining P-1 illegally are acts of continuous oppression to the petitioners. The respondents' conduct has been burdensome, harsh and wrongful. Besides, the affairs of the company have been mismanaged as pointed out above.
34. Keeping these circumstances in view, to do substantial justice between the parties, I hereby order as follows:
i. Appointment of Respondent Nos. 4,5 and 6 as directors is hereby declared null and void and status quo ante is restored. Form No. 32 dated 1.3.2005 filed with the ROC is also declared null and void.
ii. Form No. 32 filed with the ROC regarding removal of P-1 as director is declared null and void. The resolution regarding his removal is hereby set aside and P-1 is restored as director on the Board of the R-1 company forthwith.
iii. Resolution given to Respondent Nos. 8,9 and 10 (Bankers) for change in authorised signatories is hereby declared null and void and status quo ante is restored.
iv. Allotment of 4250 equity shares to R-3 (3000 equity shares) and R-8 (1250 equity shares) and Form No. 2 filed with the ROC in this regard are declared null and void and status quo ante is restored.
v. The Annual Accounts of the R-1 company for the year ended 31st March, 2005 including the notice, Directors' Report, Compliance Certificate filed with the ROC are declared null and void.
vi. The Annual Return filed with the ROC dated 30.6.2005 is hereby declared null and void.
vii. The respondents are directed to restore the amounts siphoned off from the R-1 company's accounts forthwith.
viii. The R-1 company is hereby directed to give consequential effects in implementing the directions contained in (i) to (vii) above forthwith.
35. With the above directions, the Company Petition 78/05 stands allowed. All interim orders stand vacated. All CAs stand disposed of. No order as to cost.