Company Law Board
R. Easwaran And Ors. vs Eswar Oil Industries Private Limited ... on 19 October, 2005
Equivalent citations: [2007]137COMPCAS605(CLB), (2006)5COMPLJ174(CLB), [2006]72SCL228(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In this company petition filed under Sections 397 & 398 of the Companies Act, 1956 relating to the affairs of M/s. Easwar Oil Industries Private Limited ("the Company"), the main grievances of the petitioners are that 9,000 shares of the Company issued in favour of M/s. Chemical Construction Company (P) Limited ("the fifth respondent") are not supported by consideration and that respondent Nos. 2 to 4 are attempting to sell the properties of the Company at a meagre price through private negotiations for their personal gains, without obtaining approval of the members in general meeting of the Company, thereby causing immense prejudice to the interests of the members and the Company. Against this background, the petitioners are seeking the following reliefs:
(i) To cancel the shares allotted to the fifth respondent and delete its name from the register of members of the Company;
(ii) To reconstitute the board of directors of the Company including the representation of the petitioners and appoint a new chairman of the Company;
(iii) To terminate any agreement entered into by the board of directors for sale of any portion of the property belonging to the Company.
2. Shri R. Venkataraman, learned Counsel appearing for the petitioners, while initiating his arguments submitted: The Company was promoted in October, 1974 by among others, (late) E. Ramaswamy, father of the petitioners and (late) T.V.P. Nambiar, father of the third respondent for the purpose 6f extraction of coconut oil, coconut protein and edible coconut flour as per a new formula called "SOLVOL PROCESS" invented by (late) T.V.P. Nambiar, the then Managing Director of the fifth respondent. The authorized capital of the Company is Rs. 50,00,000/- divided into 50,000 equity shares of Rs. 100/- each and the paid-up and subscribed capital is Rs. 19,00,200/- divided into 19,002 equity shares of Rs. 100/- each. The petitioners were allotted 4,063 shares of Rs. 100/- each in consideration of purchase of the landed properties belonging to them by the Company. By virtue of an agreement dated 04.10.1975, the Company provided the land and building and the fifth respondent supplied and set-up the plant and machinery on turn-key basis for.a total sum of Rs. 54,05,500/-, which shall include Rs. 6,00,000/- for the technical knowhow. Subsequently, due to escalation the Company had to agree for a revision on the plant and machinery value at Rs. 84,92,587/-. The agreement envisages, inter-alia, that the plant must yield a full-rated capacity to process 1,00,000 coconuts per day of 24 hours working, with the output as specified therein. The amount indebted by the Company towards the fifth respondent is reflected in the balance sheet of the Company for the relevant period. In the meanwhile, the Company had issued 5,000 equity shares of Rs. 100/- each and further 4,000 equity shares of Rs. 100/- each at the board meeting held on 24.07.1976 and 07.08.1976 respectively towards part satisfaction of the amount due to the fifth respondent by the Company. The issue of shares in favour of the fifth respondent was conditional upon the effective functioning of the plant based on certain agreed parameters, which were never achieved and at no point of time, could the plant reach the rated capacity of the production, viz., process of 1,00,000 coconuts per day of 24 hours working. Thus, the agreement never came into effect, as borne out by the minutes of the meetings of the board of directors of the Company dated 15.07.1978, 21.10.1978, 16.12.1978 and 10.03.1979. When the fifth respondent failed to fulfil its obligations and committed breach of the agreement dated 04.10.1975, it is not entitled to any of the shares issued by the Company. The impugned shares issued through mere book entries from the account of the fifth respondent towards part adjustment of the payment of consideration under the agreement suffers from want of consideration and is bad in law. The CLB in exercise of the powers under section 402 must set aside the impugned allotment made in favour of the fifth respondent.
The first petitioner and his father, since deceased, aggrieved by the acts of (late) T.V.P. Nambiar had filed a petition (C.P. 23/1979) before the Kerala High Court under Section 397 of the Act, seeking directions against the Company to continue the services of the first petitioner's father, as Managing Director of the Company for the un-expired period of five years as decided by the board of directors of the Company. In view of a large liabilities due to the banks and financial institutions, one of the directors of the Company had filed a company petition (CP 44/1979) before the Kerala High Court to wind-up the Company, which was supported by (late) Ramaswamy on just and equitable grounds. At the intervention of the then Chief Minister of Kerala during September, 1979, (late) T.V.P. Nambiar was afforded yet another opportunity to give satisfactory performance of the plant by giving a demonstration, which could never be achieved until his death in November, 1'979, leading to withdrawal of the company petition (CP 23/1979) by the first petitioner and his (late) father. Later, during February, 1980, the then Minister of Industries, Kerala explored the possibility of reviving the unit, whereby the company petition (CP 44/1979) for winding up the Company came to be withdrawn. The Company ultimately did not go into commercial production on account of the operational snags in the working of the plant, which resulted in huge losses and closure of the Company, upon which, the financial institutions were compelled to initiate recovery proceedings againstthe Company. When the petitioners' father expired in August, 2002, the board of directors of the Company failed to induct any member from the family of (late) Ramaswamy on the board of the Company, thereby excluding the petitioners in the management of the affairs of the Company. The respondent Nos. 2 to 4, taking advantage of demise of the petitioners' father have been conducting the affairs of the Company in a manner prejudicial to the interests of the Company and its other shareholders and taking hasty steps to sell the properties of the Company through private negotiations at a throw away price without obtaining approval of the members in general meeting of the Company, which could not be successfully stopped by the petitioners, in spite of the civil suit filed before the Sub-Judge's Court, Tirur and thereafter, the Civil Miscellaneous Appeal before the Kerala High Court. The action of respondent Nos. 2 to 4 in selling the properties of the Company in favour of third parties without approval of the members in general meeting of the Company is oppressive to the petitioners and causing unfair prejudice to the Company, which must be remedied by the Bench, in the interests of the petitioners.
3. Shri Arvind P. Datar, learned senior Counsel, while opposing the alleged acts of oppression and mismanagement in the affairs of the Company submitted: The petitioners under the guise of alleged acts of oppression and mismanagement are seeking to cancel the impugned shares issued in favour of the fifth respondent as early as in the year 1976, in lieu of the amounts due to it, under the agreement dated 04.10.1975. The grievance of the petitioners that the fifth respondent failed to fulfil its obligations under the agreement dated 04.10.1975, in spite of the arbitration clause, having been raised after a delay of 28 years cannot be entertained by the Bench. The dispute in question merely relates to breach of a contract, in which case, the aggrieved party cannot invoke the provisions of Section 397 and 398 for any remedial measure. Though any delay by itself is not fatal for claiming remedy under Section 397 as held In re: Bengal Luxnti Cotton Mills Ltd. 1965 (Vol. 35) CC 187, yet the petitioners failed to take any action for nearly three decades and, therefore, their claim must fail. Moreover, the CLB is not empowered under Section 402 to cancel the impugned shares, as sought by the petitioners. The Gujarat High Court in Sheth Mohanlal Ganpatram Vs. Shri Sayaji Jubilee Cotton And Jute Mills Co. Ltd. 1964 34 CC 777, while dealing with the powers of the Court under Sections 397 & 398 held that the remedy under Section 397 can be invoked only when the affairs of the company are being conducted in a manner oppressive to a shareholder or shareholders and similarly the remedy under Section 398 is justified only when the, affairs of the company are being conducted in a manner prejudicial to the interests of the Company. The remedy given by these sections is of a preventive nature intended to prevent occurrence or continuance of oppression or mismanagement in the affairs of the Company and is not intended, to set at naught what has already been done by controlling shareholders in the course of such oppression or mismanagement which is past and concluded and no longer a continuing wrong. The Kerala High Court in Palghat Exports Private Limited v. T.V. Chandran (1994) 79 CC 213, while dealing the object of Section 397 concluded that Section 397 prevents an existing, present state of prejudicial, oppressive, harsh, unfair conduct, but past conduct or closed affairs are not encompassed in the section. There should be continued oppression over; the period of time to seek relief under Section 397.
The prayer for cancellation of the shares indirectly amounts to forfeiture, which cannot be resorted to in the absence of any provision in the articles of association of the Company. Thus, if the shares have been allotted for Supply of the machinery, which are subsequently found to be defective, the remedy for the petitioners would be by way of claiming damages and not cancellation of the impugned shares.
The first petitioner and his (late) father had earlier filed the company petition in CP 23/1979 before the High Court of Kerala, under Section 397, alleging acts of oppression, which included the complaint regarding supply of the defective machinery and did not pray for cancellation of the impugned shares, but for continuance of the petitioners' father as Managing Director of the Company. However the company petition filed before the Kerala High Court was withdrawn without obtaining leave under Order 23, Rule 3 of the Code of Civil Procedure, 1908 and there fore the present company petition is not maintainable.
The first petitioner and his father had relinquished their claim in the company petition (CP 23/1979) for breach of the agreement dated 04.10.1975 and therefore, by applying the principles laid down in Order 2 Rule 2 of the CPC, they shall not now agitate in the present company petition in respect of the claim so relinquished. In this context, Shri Datar learned Senior Counsel pointed out that the import of Rule 6 of the Company Court Rules, 1959 is the provisions of the CPC shall apply to proceedings under the Companies Act, 1956 as far as they can be made applicable, keeping in view the nature of the proceedings and the relief claimed therein.
The Company has not been functioning for the past over two decades and is closed without carrying on any of its main activities, which led to the recovery proceedings initiated against the Company by the financial institutions. Therefore, the board of directors of the Company decided to sell the properties charged in favour of the financial institutions with the approval of the general body of the Company, as borne out by the notice dated 16.09.2002 issued to all the shareholders, including the petitioners, convening the general body meeting on 06.10.2002. The minutes dated 06.10.2002 of the general meeting of the Company clearly indicate that the board of directors, in fact, intended to proceed with the sale of the Company's properties only after obtaining consent of the shareholders. In the meanwhile, the petitioners approached the Sub-Court, Tirur, seeking an order of interim injunction restraining respondent Nos. 2 & 4 from selling the properties which was, however, declined and the appeal preferred by the petitioners against the order of the Sub-Court, Tirur, before the Kerala High Court came to be dismissed with the directions that the petitioners shall raise their grievances before the general body and thatithe Company could go ahead with the sale of the properties, only after obtaining the approval of the general body. In view of the order of the Kerala High Court, the petitioners cannot reagitate the same issue in the present company petition. Accordingly, the board of directors is not making any attempt to sell the Company's properties without the prior approval of the general body. The petitioners are stalling the bonatlde attempts of respondent Nos. 2 to 4 to liquidate the liabilities of the Company by sale of its properties. The CLB, in exercise of the inherent power under regulation 44 of the Company Law Board Regulations, 1991, may appropriately direct the petitioners in order to prevent the abuse of process of the Bench. The petitioners' (late) father at the board meeting held on 16.04.1980 categorically reported that the assets of the Company would cover the entire liabilities payable by the Company and, therefore, he was in favour of selling the properties of the Company and settle the amounts due to the fifth, respondent under the agreement dated 04.10.1975. This is contrary to the present stand taken by the petitioners before the CLB. The huge liabilities of the Company due to the fifth respondent and other creditors are reflected in the balance sheet of the Company for the relevant period, which remain unsettled by the Company. In these circumstances, the Company may be permitted to sell the properties for the best possible price with prior approval of its members in the general meeting of the Company, in terms of the order dated 10.04.2003 of the High Court of Kerala subject to the payment of dues of the financial institutions and other statutory authorities and thereafter distribute the surplus sale proceeds among the shareholders according to their holding.
4. Shri Venkataraman, learned Counsel in his rejoinder submitted: The company petition (CP 23/1979) under Section 397 was filed by the first petitioner and his father for the acts of oppression set out therein and the petitioner nos. 2 to 5 were not parties to the company petition before the High Court of Kerala. The petitioners being the aggrieved shareholders, satisfying the requirements of Section 399 are entitled to seek appropriate remedial measures in the present company petition for the acts complained of against respondent Nos. 2 to 4. Before the CLB, arguments have been extended on behalf of the fifth respondent and not on behalf of the remaining respondents. The fifth respondent instead of resisting the company petition ought to have filed a civil suit against the Company for recovery of its dues under the agreement dated 04.10.1975. During lifetime of the petitioners' father, he was in active management of the Company and on his death in August, 2002, the petitioners came into the picture and there is, therefore, no delay on their part in prosecuting the present company petition.
5. Shri V.B. Unniraj, learned Counsel appearing for the sixth respondent submitted that the Company had obtained, during the year 1976, a loan of Rs. 30 lakhs against the security of mortgage of the immovable properties and hypothecation of the plant and machinery belonging to the Company. When the Company defaulted in payment of the outstanding liability, this respondent was constrained to initiate necessary action for enforcement of the securities before the District Court, Manjeri under Section 31 of the State Financial Corporations Act and ultimately purchased the properties in court auction, which is yet to be confirmed by the Court. In the meanwhile, the petitioners have been attempting to circumvent the enforcement of the securities by approaching the High Court of Kerala and the CLB. Any order, which may be passed by the CLB authorizing the Company to sell its properties, will interfere with the lawful efforts being made by these respondents to get confirmation of the sale of the properties and delivery thereof, through District Court, Manjeri. It is, therefore, in the interest of justice, the CLB may recall the order dated 23.03.2003 authorising the board of directors of the Company to cause public notice for the puipose of selling the properties of the Company. Shri V.B. Unniraj, learned Counsel, while concluding his submissions reported that the company petition may be disposed of on merits, without prejudice to the rights of the sixth respondent over the properties, being the subject matter of the company petition.
6. I have heard learned Counsel for the parties. The main issues in controversy are-
(i) the issue of 9,000 equity shares of the Company in favour of the fifth respondent; and
(ii) the sale of the Company's properties by respondent Nos. 2 to 4.
It is on record that the board of directors of the Company resolved at the meeting held on 24.07.1976 to issue 5,000 equity shares and further resolved on 07.08.1976 to issue 4,000 equity shares of the Company to the fifth respondent "in part satisfaction of the amount due to the Company "(the fifth respondent). By virtue of the agreement dated 04.10.1975, the fifth respondent was to supply the plant and machinery on turn-key basis to the Company for an amount of Rs. 55,05,500/-, which shall include Rs. 6,00,000/- for the technical know-how, for the purpose of wet processing of fresh coconut kernels with a capacity to process 1,00,000 coconuts per day of 24 hours. The amount of Rs. 54,05,500/- shall be payable by the Company in instalments as stipulated in the agreement. However, due to escalation, the Company had agreed for a revision on the plant and machinery value at Rs. 8492,587/-. The balance sheet of the Company for the year ended 31.03.1986 shows that the Company was indebted to the extent of Rs. 29.54 lakhs in favour of the fifth respondent. Similarly, the statement of current assets, loans and advances in relation to the fifth respondent produced at page 170 of the typed set of documents produced by the respondents reveals that the Company was indebted an amount of Rs. 35.13 lakhs to fifth respondent. Against this background, the various clauses contained in the agreement dated 04.10.1975, assume relevance for adjudicating the controversial issue of shares in favour of the fifth respondent, relevant of which are set out here under:
The fifth respondent shall design, manufacture, transport, erect and commission plant at the site of the Company with a full production capacity of 1,00,000 coconuts per day of 24 hours working with an output of:
(a) Protein .. 2% on the weight of the input kernal
(b) Invert Sugar .. 2 1/2 % on the weight of the input kernal
(c) Coconut Flour .. 5% on the weight of the input kernal
(d) Residual oil content. Not more than 7%.
The fifth respondent must bring the plant into operation within a period of 12 to 15 months from the date on which Kerala Financial Corporation releases its first instalment of loan provided the Company fulfills all its obligations under the agreement on the due dates. If there is any delay on the part of the Company, the stipulated time would automatically be extended. The fifth respondent would be liable for any loss, which may be suffered by the Company on account of the delay, if any caused by the fifth respondent in implementation of the contract.
The handing over of the plant by the fifth respondent shall be effective on the day the plant processes 1,00,000 coconuts per day of 24 hours working.
In case of any dispute or difference shall arise between the Company and the fifth respondent, it shall be referred to arbitration in accordance with the provisions of the Indian Arbitration Act, 1940.
The various minutes of the meetings of the board of directors of the Company held on 15.07.1978, 21.10.1978, 16.12.1978 and 10.03.1979 show that the fifth respondent could not fulfil its obligations in full in accordance with the agreement dated 04.10.1975. In the company petition filed (CP 23/1979) before the High Court of Kerala under Section 397 of the Act, one of the grievances of the first petitioner and his (late) father was that "the Company has not so far reached the full-rated production target. It was still in the trial-run starts (stage)" (para 10 page 5). When one of the directors, viz., Ramachandran lyer had filed a liquidation petition (CP 44/1979) on the file of the High Court of Kerala for dissolution of the Company, the petitioners' father, while supporting the winding up petition, filed a reply affidavit in August, 1979 affirming, inter-alia, that the fifth respondent failed to fulfill its obligations under the agreement dated 04.10.1975. Thus, it is far from doubt that the fifth respondent reportedly committed breach of the agreement, which was in the knowledge of the first petitioner and his group. The petitioners are invoking Section 397 in order to cancel the shares allotted in favour of the fifth respondent for want of consideration, pursuant to breach of the terms of the agreement. It shall now be considered whether this grievance falls within the ambit of Section 397 so as to make any appropriate order with a view to bring to an end the aggrieved act. The Supreme Court and-different High Courts, while considering the Court's jurisdiction under Sections 397 & 398, categorically held that the conduct of the majority shareholders must be oppressive to the minority shareholders. The conduct must be burdensome, harsh and wrongful. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company are being conducted in a manner oppressive to some part of the members. The object of these sections is to terminate or prevent an existing, present state of prejudicial, oppressive, harsh, unfair conduct and past conduct or closed affairs are not envisaged in these sections. Any past act which have come to an end would not be taken for the purpose of invoking the court's jurisdiction under Section 397. The remedy provided by these sections is of a preventive nature in order to bring to an end oppression or mismanagement in the affairs of the Company and not to allow its continuance to the detriment of the aggrieved shareholders or the company. Section 397 can be invoked when the affairs of the company are being conducted in a manner oppressive to a shareholder or shareholders and similarly Section 398 can be invoked only when the affairs of the Company are being conducted in a mannenprejudicial to the interests of the Company. The decisions cited by Shri Datar, learned Senior Counsel, viz., Sheth Mohanlql Ganpatram v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. and Palghat Exports Private Limited v. T.V. Chandran recognize the essential requirements of Section 397 & 398. The grievance of the petitioners is that the impugned shares were issued in favour of the fifth respondent towards part adjustment of the payment of consideration under the agreement dated 04.10.1975, which never came into effect, notwithstanding that (late) T.V.P. Nambiar made several promises to increase the efficiency of the plant to the promised levels on several occasions and, therefore, the agreement suffered from want of consideration. Accordingly, the petitioners are seeking to cancel the impugned shares allotted to the fifth respondent company and delete its name from the register of members of the Company. It shall be borne in mind that this grievance of the petitioners is as a result of the alleged breach of the contractual obligations rising out of the agreement dated 04.10.1975. Similarly, the relief claimed by the petitioners for cancellation of the impugned shares is directly arising from and out of the alleged breach of the agreement dated 04.10.1975. The grievance and relief undoubtedly flowing from the agreement must necessarily be agitated in a competent court having jurisdiction over the matter, more so, when the requirements of Section 397 or 398 remain unsatisfied and, therefore, cannot constitute an act of oppression or mismanagement in the affairs of the Company. Any remedy for the alleged breach of the agreement and the consequential relief do not lie before the CLB, particularly when these acts, in my view, do not make out any cause of action under Section 397 or Section 398.
It is observed that the petitioners having aggrieved on account of the purported hasty action of the respondent Nos. 2 to 4 in selling the properties of the Company had filed a civil suit (O.S. No. 179/2002) on the file of the Subordinate Judges' Court, Tirur seeking to grant a decree for permanent injunction restraining respondent nos.2 to 4 from selling the properties of the Company and accordingly obtained in I.A. No. 173/2002, an order of interim injunction till the disposal of the suit, which, however, came to be dismissed, after hearing the application on merits, by an order dated 17.03.2003. The petitioners preferred an appeal in C.M.A. No.87/2003 before the Kerala High Court against the order-dated 17.03.2003 of the Sub-ordianate Judge's Court, Tirur, wherein the High Court passed on 10.04.2003, the following order:
3. Considering the facts and circumstances of the case, we order that even though Managing Director has entered into various agreements for sale of the properties they could be given effect to only after getting approval of the general body. If the petitioners have got any grievance they can raise the same in the general body. Needless to say Company has to give notice to all the members so that they could get an opportunity to raise their views in the general body and it is for the general body to consider all the aspects of the matter with which we express no opinion. It is so ordered.
The present grievances in regard to the sale of the properties of the Company as set out in para 6.36 of the company petition read thus:
Now after the disposal of the CMA, the respondents are going ahead with the sale of the company properties to different persons in small plots and to get the ratification of the general body to be convened as per directions of the Hon'ble High Court. By exercise of the strong voting power they hold with Chemical Construction Co (P) Ltd., by holding shares worth lakhs they will be able to get the ratifications approved by the general body which is only a formal ritual to go through and this will be a total negation of the rights of the minority shareholders.
The apprehension of the petitioners that respondent Nos. 2 to 4 are acting detrimental to the interests of the Company and that the shareholders are attempting to sell the entire land and building belonging to the Company in a total negation of their rights is adequately safeguarded by the order of the High Court made on 10.04.2003, wherein it has been stipulated that agreements for sale of the properties could be given effect to only after getting approval of the general body. This order is in force and binding upon the respondents. Nevertheless, the petitioners approached the CLB in May 2003 itself with similar grounds and for identical prayer restraining the respondents from selling the Company's properties. In these circumstances, the statement of the respondents that the board of directors will not sell the Company's properties without prior approval of the general body and that the properties will be sold for the best possible price in strict compliance with the order dated 10.04.2003 of the Kerala High Court, safeguarding the interests of the minority shareholders is taken on record and they must strictly act accordingly, which shall, however, be without prejudice to the rights of the financial institutions in realization of their outstanding dues from the Company and the statutory dues, if any. With these directions, the company petition stands disposed of. All interim orders are vacated. No order as to costs.