Company Law Board
S. Palaniappan And Ors. vs Tirupur Cotton Spinning And Weaving ... on 22 January, 2004
Equivalent citations: [2005]128COMPCAS536(CLB)
ORDER
K.K. Balu, Member
1. This is a petition filed under Section 397/398 of the Companies Act, 1956 ("the Act") alleging certain acts of oppression and mismanagement in the affairs of M/s Tirupur Cotton Spinning and Weaving Mills Limited ("the Company") and claiming various reliefs set out therein with a view to bring to an end the matters complained of in the petition.
2. Shri C. Harikrishnan, the learned Senior Counsel appearing for the petitioners, while initiating his arguments submitted that the Company was incorporated under the provisions of the Indian Companies Act, 1913 on 9th February 1954 with the main objects to act as cotton spinners etc. with an authorized capital of Rs. 25,00,000 divided into 23,000 equity shares of Rs. 100/- each and 20,000 shares of Rs. 10/-each and paid-up capital of Rs. 8,64,600 consisting of 8,646 equity shares of Rs. 100/- each. As at 31.03.1989, the paid up capital of the Company was Rs. 8,64,600, out of which 51% amounting to Rs. 4,41,000 was held by the petitioners and their family members. During the year 1989, the Company was in financial difficulties and became a sick Company as a result of which the affairs of the Company were referred to the Board for Industrial and Financial Reconstruction (BIFR) for purposes of developing rehabilitation programme. The respondent Nos. 5 & 6 and their group had submitted before the BIFR a proposal to revive the Company, upon which the BIFR had on 14.02.1990 sanctioned a scheme for reviving the Company. Accordingly, the sixth respondent and his group were required to bring in funds of Rs. 20 Lakhs by way of equity in addition to conversion of the existing dues of Rs. 14 lakhs of the Company into non-cumulative preference shares and further bring in additional funds of Rs. 10 lakhs during the year 1990-1991 in the form of preference shares both redeemable after the scheme period. However, the respondents brought in only a sum of Rs. 5 lakhs though they were allotted 20,000 equity shares of Rs. 10/- each. The remaining amount was brought in by running the Company and siphoning of the funds. The learned Senior Counsel pointed out that these preference shares, which are required to be redeemed after the period of rehabilitation scheme are deemed to be abolished and extinguished, when the Company is discharged from the BIFR and, therefore, cannot be taken into reckoning as part of share capital of the Company. By virtue of the order dated 14.02.1990 of the BIFR, the respondents were permitted to hold only Rs. 20,00,000/- worth of equity shares. Any additional issue of shares, not in consonance with the BIFR order is invalid and cannot be binding on the Company and petitioners. The respondents have not produced any order of the BIFR permitting the increase of share capital in excess of what has been sanctioned under the order dated 14.02.1990. Consequently the paid up capital of the Company could only be Rs. 28,64,600/-. The order dated 14.02.1990 of the BIFR approving the draft scheme and the order dated 29.01.1997 of the BIFR show that 51% of the shares in the Company with face value of Rs. 4.40 lakhs are held by the petitioners. According to the respondents themselves, the petitioners are holding shares worth of Rs. 3,30,700/-, consisting more than 10% of the issued capital of the Company. The learned Senior Counsel pointed out that the shares inherited by the petitioners as the legal representatives of the deceased M.R. Alamelu Achi and M. Shanmugam Chettiar and 891 shares of Rs. 100/- each got transferred from Shri Nanjappa Mudaliar and Shri S. Ramasamy in favour of the petitioners have not been included by the respondents in the share holding of the petitioners. The legal heirs of a deceased shareholder have a right to represent in a Section 395/398 proceeding as held by the apex court in AIR 1990 SC 737. The shares which are impugned in the petition should not be taken into account to determine qualification of shares as held by the Company Law Board in a number of cases. The learned Senior Counsel contended that the petitioners do hold 10% of the issued capital of Rs. 28,64,600/- entitling them to agitate their remedies before the CLB. While concluding his submissions, the learned Counsel pointed out that the order dated 29.01.1997 of the BIFR clearly indicates that the new promoters did not bring in their envisaged contribution. The directors in the control of the affairs of the Company manipulated the affairs of the Company by increasing the authorised capital from time to time and the increase in the capital was done by siphoning of funds from the Company itself. The increase in the capital was not with any genuine purpose, but only with the intention of taking away the Company out of the clutches of the BIFR. The increase of capital was without any authority and is illegal. Though the new promoters had represented before the BIFR that they were seeking to modernise the equipments so as to improve the quality and productivity of yarn, they had in fact stopped spinning and weaving activities and took steps to diversify into knitting business against the objects of the Company. The Company further played fraud on the BIFR and misled the Board and obtained an order of discharge by terminating the scheme approved by it, with the object of handing over the Company to the second respondent and his group, thereby making secret profits to the detriment of the Company. The Board of Directors had with fraudulent intention sold during the year 1999-2000 the assets of the Company including the land, building, plant and accessories, furniture etc. and made enormous profits. Shri Harikrishnan, learned Counsel, therefore, pressed for the reliefs claimed in the petition.
3. Shri V. Ramakrishnan, learned Counsel appearing for the respondents at the outset contended that the petition is not maintainable in view of the fact that the petitioners hold less than 10 per cent of the issued capital of the Company and further that the petitioners do not constitute one-tenth of the total number of its members. According to Shri Ramakrishnan, the shareholding pattern as on 31.03.1995 is not under dispute as borne out from the prayer made in the Company Petition for setting aside any allotment of shares made by the Company pursuant to the increase in the authorised capital on 30.09.1996. Accordingly, the issued share capital of the Company as on 31.03.1995 is Rs. 49,00,000/- constituting the following:-
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1. 13000 - 7.8% cumulative preference shares of 3,00,000 Rs. 100 each
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2. 14,000 - 10 years 14% Redeemable preference 14,00,000 shares of Rs. 100 each
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3. 10,000 - equity shares of Rs. 100 each 10,00,000
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4. 2,20,000 - equity shares of Rs. 10 each 22,00,000
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TOTAL 49,00,000 The petitioners presently holding shares of only Rs. 3,30,700 do not account for 10 per cent of the undisputed issued share capital of Rs. 49,00,000, as prescribed under Section 399(1)(a) of the Act. In this connection, Shri Ramakrishnan referred to the oral submissions made on behalf of the petitioners in CP No. 269 of 2001 and CA No. 1306 of 2001 on the file of High Court of Madras to the effect that the petitioners could not approach the Company Law Board as they hold less than 10 per cent of the shares. Shri Ramakrishnan pointed out that the preference shares forming part of the issued Capital as on 31.03.1995 are still in existence and form part of the issued share capital in the balance sheet for the year ended 30.09.2000. These preference shares will continue to remain in existence until they are redeemed as provided under law and, therefore, the preference shares will have to be taken into account for determining the issued share capital of the Company. According to Shri Ramakrishnan, though the petitioners claim to be the legal representatives of the deceased Shanmuga Chettiar and Alamelu Achi, there is no document to show that the petitioners are the only legal heirs of these deceased shareholders. The petitioners have neither produced the share certificates of the shares claimed to be transmitted in their favour or the share certificates in respect of 891 shares said to be transferred to them nor given any detail in regard to these shares. Under these circumstances, the petitioners cannot claim the benefit of these shares for the purpose of determining the qualification shares within the meaning of Section 399. Moreover, the Company has more than 400 members and the petitioners do not represent 10 per cent of the total number of its members. Shri Ramakrishnan referred to the various orders of the BIFR towards rehabilitation of the Company. By virtue of the order dated 14.02.1990, the new promoters were to bring in Rs. 20,00,000, convert the outstanding dues of Rs. 14,00,000 against the Company into non-cumulative preference shares and also bring in additional funds of Rs. 10,00,000 during the year 1990-91 in the form of preference share capital. The scheme was modified on 09.07.1996 by which the new promoters were to bring in Rs. 59,00,000 towards the promoters' contribution on account of the increase in the cost of rehabilitation of the Company. Accordingly, the new promoters brought in their contribution as evidenced from the order dated 10.04.2001 of the BIFR and borne out by the balance sheets of the Company for the relevant period. The petitioners are estopped from questioning the observations and the finding of the BIFR made in its order dated 10.04.2001 confirming the contributions brought in by the new promoters as envisaged in the scheme. In these circumstances, the petition is not maintainable and liable to be dismissed in limini.
4. After considering the pleadings and arguments of the learned Counsel, the issue that arises for our consideration is whether the petitioners hold the requisite share qualification specified in Section 399 entitling them to file an application under Section 397/398, for the alleged acts of oppression and mismanagement in the affairs of the Company. A careful perusal of the records made available before us reveal that the Company was incorporated in the year 1954 with the authorised capital of Rs. 25,00,000 divided into 20,000 ordinary shares of Rs. 100/- each, 20,000 ordinary shares of Rs. 10/- each and 3000 preference shares of Rs. 100/- each. Though the petition is silent of the preference shares forming part of the authorised capital, they are reflected in the Articles of Association and the balance sheet of the Company for the years ended from 31.03.1989 to 30.09.2000. The issued and paid-up capital as at 31.03.1989 stood at Rs. 15,00,000 and Rs. 8,71,600 respectively, as borne out by the balance sheet for the year ended 31.03.1989, which was signed, among others, by the first petitioner. Thus, the claim of the petitioners in the petition that the issued and paid-up capital as of the year 1989 was Rs. 21 lakhs is found to be incorrect. When the Company became a sick industrial company, within the ambit of the Sick Industrial Companies (Special Provisions) Act, 1995 ("SICA") in the year 1988, it approached the BIFR for revival, upon which a scheme for the rehabilitation of the Company was sanctioned by the BIFR by an order dated 14.02.1990 made under Section 18(4) read with Section 19(3) of the SICA (Pages 66-71 of Counter statement). The scheme envisaged take over of management by the new promoters, viz., Shri Shanmughar Chettiar and Shri N. Ramaswamy Gounder. The cost of the scheme was estimated to be Rs. 192 lakhs and was to be financed by way of promoters' contribution of Rs. 20 lakhs and term loan of Rs. 172 lakhs through financial institutions and banks. The scheme further envisaged that the new promoters should convert the outstanding dues of Rs. 14,00,000 against the Company into non-cumulative preference shares and bring in additional funds of Rs. 10 lakhs during the year 1990-91 in the form of preference share capital, both redeemable after the period of rehabilitation. The scheme was modified on 09.07.1996 enhancing the Company's total requirement of funds to Rs. 236 lakhs, to be met by, inter-alia, the promoters' contribution of Rs. 59 lakhs, as stipulated by the BIFR in its order dated 29.01.1997 (Pages 77-85 of counter-statement). It is abundantly clear from both the orders dated 14.02.1990 and 29.01.1997 of the BIFR that the petitioners held shares of the Company of the face value of Rs. 4.40 lakhs. The issued and paid-up capital were increased to Rs. 35,00,000 and Rs. 28,71,600 respectively as disclosed by the balance sheet for the year ended 31.03.1991. This increase of the issued and paid-up capital by Rs. 20,00,000 was pursuant to the contribution made by the new promoters under the order dated 14.02.1990 of the BIFR. The issued and the paid-up capital were further raised to Rs. 49,00,000 and Rs. 42,71,600 as borne out by the balance sheet for the year ended 31.03.1992. This increase was by means of conversion of the Company's loan of Rs. 14 lakhs into non-cumulative preference shares under the authority of the order dated 14.02.1990 of the BIFR. The balance sheet for the year ended 31.03.1995 discloses share application deposit of Rs. 5,00,000. The issued and paid-up capital were further increased to Rs. 69,00,000 and Rs. 62,71,600 respectively as revealed from the balance sheet for the year ended 31.03.1998. The increase of Rs. 20,00,000 was pursuant to the contribution made by the new promoters under the modified scheme of the BIFR. The balance sheet for the year ended 30.09.2000 shows an increase of Rs. 51,84.605 under the head of Share Application Money. In other words there was increase in the issued and paid-up capital from time to time and the new promoters brought in Rs. 20,00,000 during the financial year 1990-91, converted the Company's dues of Rs. 14.00.000 into non-cumulative preference shares during the year 1991-92, brought in Rs. 5,00,000 by way of share application deposit during the year 1994-95 and Rs. 20,00,000 during the year 1997-98 amounting to Rs. 59,00,000/-. These payments are found to be recognised and approved by the BIFR in its order dated 10.04.2001 (Pages 135-140 of Counter Statement), the relevant portion of which reads as under: -
"6. The Bench observed that the company had cleared the dues of the term lenders and the promoters had also brought in their envisaged contribution. The company's working capital account, as confirmed by SBT's representative, was regular. As per the audited balance sheet of the company as on 30.09.2000 filed today with the Board, the company had earned a net profit of Rs. 122 lakhs including profit of Rs. 49.32 lakhs on sale of assets during 18 month period ended on 30.09.2000 and its networth has become positive by Rs. 77 lakhs, constituted by paid up capital of Rs. 63 lakhs and free reserves of Rs. 14 lakhs. Besides, an amount of Rs. 56.85 lakhs is also lying in the share application deposit account: The entire accumulated losses of the company have been fully wiped out."
It is, therefore, clear from the above findings of the BIFR that the new promoters had brought in their contribution aggregating Rs. 54,00,000, which is exclusive of Rs. 5,00,000/- by way of share application deposit towards the equity and preference shares of the Company. The paid-up capital of Rs. 8,71,600/- as at 31.03.1989 together with the contribution of Rs. 54,00,000 made by the new promoters amounting to Rs. 63,00,000/- is in consonance with the order of the BIFR. The contributions made by the new promoters were under the authority of the BIFR, covered under its various orders and reflected in the various balance sheets of the Company cited supra, which cannot be questioned by the petitioners belatedly at this stage. Against this background, the issued capital of the Company as at 31.03.1998 is found to be Rs. 69 lakhs, after the increase from Rs. 15 lakhs as at 31.03.1989, whereas the petitioners are holding shares with face value of Rs. 4.40 lakhs only, in which case they do not hold the requisite qualification shares specified in Section 399. The situation would not change even if the non-cumulative redeemable preference shares of Rs. 14 lakhs are excluded from the issued capital and the shareholding of the petitioners is increased by 891 shares said to be transferred in their favour prior to the BIFR order made in the year 1990. Admittedly, the petitioners do not represent 10 per cent of the total number of members of the Company. The plea of the learned Senior Counsel appearing for the petitioners that the respondents had misrepresented before the BIFR cannot be agitated in the present proceedings. We are inclined to go by the observations and findings of the BIFR, a statutory body, which has categorically observed that the new promoters have brought in their envisaged contribution. For these reasons, we have no hesitation to hold that the petitioners do not quality under Section 399 to make an application under Section 397/398 of the Act. Accordingly, the petition is dismissed, however, without going into the alleged acts of oppression and mismanagement in the affairs of the Company. After conclusion of the arguments, we found the necessity of calling for the record file of the Company from the Registrar of Companies, Tamil Nadu, Coimbatore for verification of the shareholding pattern in the Company and hence the delay in pronouncement of the order.
No order as to costs.