Company Law Board
Mrs. M.R. Shah vs Vardhman Dye-Stuff Industries P. Ltd., ... on 27 January, 2005
Equivalent citations: [2005]128COMPCAS710(CLB), [2005]60SCL623(CLB)
ORDER
K.C. Ganjwal, Member
1. This petition has been filed by Mrs. Shah against M/s Vardhman Dye-stuff Industries Pvt. Ltd. under Section 397/398 of the Companies Act, 1956 complaining oppression on minority shareholder and mismanagement of Respondent No. 1 Company perpetrated by Respondent Nos. 2, 3 and 4 (hereinafter referred to as Dharod Group).
2. The petitioner is holding 28% of the shares in respondent No. 1 company from the very inception but was never involved in day to day affairs of the company. Respondent No. 2 is also the Managing Director of the respondent No. 1 company and Respondent Nos. 3 and 4 are directors of respondent company. The company was incorporated in 1992 under the Companies Act, 1956 having its Registered Office at Vardhman Mansion, Chinch Bandar, Mumbai. The company has its factory at MIDC, Tarapur, Maharashtra. In 1997, the paid up share capital of the company was raised to Rs. 3-4.0 lacs. The company is engaged in the business of manufacture and sale of dye-pigment chemicals. The present petition has been filed as the petitioner is aggrieved by the oppression and mismanagement caused by the respondent Nos. 2, 3 and 4.
3. The learned counsel for the petitioner submitted that the respondent company was in need of working capital and it was necessary for the promoter directors to induct funds by way of unsecured loans. The Dharod Group of shareholders -inducted Rs. 50.57 lacs into the company by way of unsecured loans advanced by-, their relatives and friends. The petitioner inducted Rs. 30.55 lacs in the respondent company by way of unsecured loans. In addition as a promoter director the petitioner has given personal guarantee to Maharashtra State Financial Corporation and Corporation Back and has given collateral security of her personal assets to the tune of Rs. 6 lacs. In ail, the petitioner had blocked about Rs. 20 lacs worth of her personal funds for the use of company. Over and above a sum of Rs. 9.52 lacs invested as share capital towards her 28% shareholding. Till the year 2000 the respondents often requisitioned the services of that petitioner's' husband Mr. Rajesh Shah, a qualified Chartered Accountant. He was only reimbursed out of pocket expenses for conveyance etc. After the year 2000 the respondents have avoided to take his help and the petitioner is completely out of from the affairs of the company. In the year 2001 the petitioner became aware of various acts and omissions of respondent and despite her request to permit her to inspect the books of accounts, the respondent refused to even allow to enter the company's office. The petitioner believes that the affairs of the company are being conducted in a manner oppressive to the petitioner who is a minority shareholder and also prejudicial to the interest of the company.
4. The Learned Counsel for Petitioner submitted that the respondent company availed 3 term loans of about Rs. 90 lacs in total in 1994, 1996 and 1997 from Maharashtra State Financial Corporation against Factory Plant and Machinery. The Respondent No. 3 offered residential premises at Andheri as collateral security for the above stated term loans. All directors of the company and Mr. Rajesh Shah, husband of the petitioner have given their personal guarantee for repayment of loans. However, Respondent No. 2 to 4 sold the said flat to One Mr. Joseph without approval of MSFC and without authorization of Board of Director of the company. The consent of guarantor was also not sought. The sale proceeds of the flat were utilized by Respondent for their personal use. The Respondents have admitted for selling the flat and they have not given any specific reply to the allegations of the petitioner. This act exposes the petitioner and her husband to serious civil consequences if MSFC invokes the personal guarantee given by them. MSFC has been insisting of alternative flat, but the Respondents failed to provide the same. Thereafter, MSFC insisted for a fixed deposit of 20 lacs which the Respondents paid. This amount was also given to MSFC without the approval/ sanction of Board of Director or even informing the petitioner. Thus the Respondents have misapplied Rs. 20 lacs of funds belonging to the Respondent Company. The petitioner has also filed an application Under Section 543 read with schedule DC of the Companies Act, 1956 for recovery of Rs. 20 lacs. The Respondents have replied that the amount of Rs. 15 lacs has been adjusted against the principal loan amount. This reply is not true and the letter dated 29.9.2003 relied by the Respondents does not support their contentions, rather it states that the amount of Rs. 15 lacs would be kept as an alternative security in lieu of the flat sold by the Respondents. Thus the Respondent have mismanaged the financial affairs of the Company and exposed the petitioner and her husband to civil liabilities and further have misapplied the Company's fund to the extent of Rs. 20 lacs
5. The Learned Counsel for Petitioner mentioned of siphoning and misuse of fund by illegal sale of DEPB licenses by the Respondents. The Learned Counsel submitted that company is engaged in export business and DEPB license are issued to the company in order to either import material to be used to many manufactured goods for export or for direct sale in the market licenses about Rs. 20 lash was received by the company in 1991 but the said licenses were sold by the Respondent and the same proceeds of this license were not accounted in the books of the company. Thus the Respondent misappropriated Rs. 20 lacs of the Company and acted in a manner prejudicial to tie interest of the company, he Respondents have stated that their Export Officer, Mr. Anavkar, allegedly committed fraud of the company and mis-utilized the licenses in August 1999. The first FIR was filed only after 17 months on 9.11.2000 and no explanation has been given for cither the inordinate delay in filing the complaint or how the consideration for the license was not obtained from Mr. Anavkar when at the time of his resignation, This FIR relates only to licenses worth Rs. 8 lacs out of the figure of about 20 lacs. No FIR or complaint has been filed till date. In respect of loss of other licenses worth Rs. 12 lacs the audit report for the year 2000-2001 do not mention any thing about the alleged loss of these licenses. The Respondent have not filed any evidence regarding receipt of sale proceeds of the DEPB license or any steps taken for its recovery, as the consequences of which the Respondent company have been deprived of its funds and resulting into loss of Rs. 20 lacs due to financial mismanage of Respondent No. 2 to 4 The Learned counsel relied on the following judgments: -
(1) Col. Kuldip Singh v. Paragaon Utility finance Pvt. Ltd. (1988(64) Companies Act, 1956 Case 19) The Punjab & Haryana High Court has held that where a manager had embezzled a considerable sum of money, but the management took no serious action for its recovery the affairs of the company are held to be mismanaged.
(2) Lord Denning in Scottish Corporation case 1958 (3) All E.R. 66 at 88 (HL) has observed as follows:-
It is said that these three directors were, at most, only guilty of inaction of doing nothing to protect the company. But the affairs of the Company can in my opinion be conducted oppressively by the directors doing nothing to defend its interest, when they ought to do something, just as they can conduct its affairs oppressively by doing something injurious to it interest when they ought not to do it.
6. The Learned Counsel for Petitioner further submitted that the Respondent Company's business has been diverted to other companies owned by Dharod Group. The Respondent company sold goods worth Rs. 23 lacs to another Indian company in 1998-1999 namely Vardhman impacts Pvt. Ltd. which is wholly owned by a Respondents Group and in terms, the goods were exported to M/s U.K. Seung Chemical Company, Korea to whom Respondent company was exporting directly. The payment by Vardhman impacts Pvt. Ltd. as well as interest has not been paid to the Respondent Company on the outstanding amount of Rs. 13 lacs for the financial year 1999-2000 onwards. The Respondent Nos. 2 to 4 have misrepresented to the bankers and fraudulently use the funds of the Respondent Company for repayment of debts of Vardhman impacts Pvt. Ltd. The Respondents have admitted in their reply to application Under Section 543 of the Companies Act that Vardhman impacts Pvt. Ltd. was have financial problem and the Bankers did not pay the Respondent company amount of Rs. 13 lacs approximately The Respondents have also stated that the Respondent company would received the amount from Vardhman impacts Pvt. Ltd. On this ground of diversion of business alone, the petition is liable to be allowed. Moreover, Respondents have diverted export business to Vardhman Buildcon Pvt. Ltd., another company wholly owned by Dharod Group. The Respondents have neither taken any approval nor disclosed their interest and nature of such transactions. The Learned Counsel for Petitioner relied on the judgment of High Court of Punjab and Haryana in the case of Col. Kuldip Singh v. Paragaon Utility Finance Pvt. Ltd. (1988(64) company cases 19 that passing of resolution without such disclosure amounts to oppression within the meaning of Section 397 of the Companies Act, 1956. Also no notice has been given as required Under Section 297 (1) of the Companies Act, 1956.
7. The Respondents in their reply have admitted that export business was and is being diverted to Vardhaman Buildcon Pvt. Ltd. for the purpose of availing the benefit of Sale Tax deferred scheme. Such an act without any sanction of the Board of Directors tantamount of violations of Section 211 (3A), 299 and 297 of the Companies Act, 1956. Thus the Respondent under the guise of the sale tax benefit, are siphoning of profits of the Respondent Company. In a similar situation Nourse J., in the case of In re. London School of Electronic Ltd. (1985) Butterworth Company Law Cases 273, has held that diversion of business opportunities from the company to another company, controlled by a director who a majority share holder in the first company, was to be oppressive as it deprived the minority of the profits attributable to that opportunity. The Respondent Nos. 2 to 4 are deliberated diverting the export business worth crores of rupees of the Respondent company to their wholly owned companies and are creating sale tax liability on the Respondent company which is to paid after 12 years.
8. The Learned Counsel for Petitioner further submitted that Respondent No. 2 has withdrawn Rs. 20 lacs for himself vide Cheque No. 0330023 drawn on Respondent company Banker, Corporation Bank, Mumbai. There is no resolution of Board of Directors authoring this withdrawal. The Respondent No. 2 repaid this amount to the Respondent Company without any interest of 3 days for which such a large amount was used by him. In the Tax Audit Report for the relevant year, the sequence of this transaction has been reversed to falsely show that the money was first advanced by Respondent No. 2 to the Respondent Company and was repaid by the company to Respondent No. 2 after 3 days. This is a clear case of mismanagement and breach of Section 211(1)(e) of the Companies Act, 1956.
9. The Learned Counsel for Petitioner further submitted that the in the application Under Section 543 of the petitioner, the petitioner has furnished the date wise transactions to M/s Deepak Enterprises , the firm wholly owned by Respondent Nos. 2 to 4. These transactions were made without the approval of Board of Directors. The Respondents have provided the details of loans of this Company from 31.3.1995 to 31.3.1999 but they have avoided giving loan balance position. The Respondent have admittedly advances loan to M/s Deepak Enterprises during the year 2001-02. The Respondent are using company's funds for their other business ventures without the sanction of Board of Directors as M/s Deepak Enterprises trading in cement while Respondent company is manufacturing in dyes pigment. This financial mismanagement is in violation of Section 292 & 299 of the Companies Act, 1956.
10. The Learned Counsel for Petitioner also submitted that Respondent Nos. 2 to 4 were misusing the funds and treating it as a non banking financial company while transferring huge funds of Respondent company to their personal bank account their groups funds, relatives etc. inspite of huge financial liabilities payable to MFSC, Corporation Bank and other creditors of Respondent company. The Respondents had given loans of about Rs. 8.40 lacs to outside parties, relatives and friends having no business relation with Respondent Company. A further loan of Rs. 21 lacs has been given to outsider during the years 2002-2003 and 2003-2004. On the other hand, the genuine creditors of the company have not been paid. The advances have been given to outsider having no business with the Respondent Company. The Respondent Company is a manufacturing company and it cannot give loan as normal business activity. The alleged justification of repayment of sale tax liability after 12 years is also eyewash. The unsecured loans /deposits of Dharod amounted to Rs. 50.57 lacs and by petitioner amounting to Rs. 30.55 lacs. Initially both the promoter groups introduced these unsecured loans but from 20C0 Dharod group is reducing its group unsecured loans faster than the petitioner group. No resolution has been passed by the Board of Directors. The company has violated the provision of 292 & 299 of the Companies Act, 1956.
11. The Learned Counsel for Petitioner also submitted that Respondent no 2 to 5 in order to prevent their mismanagement and misdeed being exposed, neither calling Quarterly Board Meeting nor calling Annual General Meeting, nor furnishing any information to the petitioner about company affairs, including accounts of the company. The audited accounts for the year ending 31st March 2001 were not sent to petitioner and she has not signed the same. The respondents are manipulating profit and loss account.
12. The Learned Counsel for Petitioner relied on the judgment of Col. Kuldip Singh Dhiilon and Ors v. Paragoan Utility Financial Pvt. Ltd. and Ors. which has already been discussed. The other judgments relied is Hemant D. Vakil and Ors. v. RDI Print and Publishing Pvt. Ltd. and Anr. (1995 Vol. 84 Company Cases 838) wherein it is held that the Directors of a company, who are in fiduciary position vis a viz company, must exercise their powers for the benefit of the company. It is well established principle when directors decided a course of action which is advantageous to them but injurious to company and even if majority of shareholders support them, the directors are not acting as directors but are wronging the company as third persons and are liable for action. The other judgment relied on the learned Counsel in the case of Chander Krishan Gupta v. Pannalal Girdharl Lal Private Ltd. and Ors. (1984 vol. 55 Companies Act, 1956 company case 702) wherein it is held that the first is that positive acts are done by the management which result in prejudice being caused to the company, Secondly, Section 398 may be attracted even where no action results in prejudice being caused to the company. In other words, the expression "the affairs of the company are being caused conducted in a manner prejudicial to the interest of the company" in Section 398(1) (a) will take within its ambit the non-conduct' of the affairs of the company which non-conduct results in prejudicial being caused to the company. The non-conduct may arise for a variety of reasons including serious disputes amongst the board of directors of the company which results in a complete deadlock or stalemate.
13. The Learned Counsel for Petitioner summing up with the arguments submitted that the mismanagement of the affairs of Respondent Company, particularly financial mismanagement stated by them would invite an investigation Under Section 237 of the Companies Act, 1956. There is a complete distress between the members of the company and the petitioner is oppressed because of mismanagement of Respondent company and financial loss thus arosen in value of the share of the Respondent company and ultimate loss to the shareholder. The Learned counsel submitted that the company petition, therefore, be allowed.
14. The Learned Counsel for Respondent in reply submitted that the present petition filed is the void of any merit, baseless and deserve to be dismissed. The petitioner have been repeatedly writing various letters to the department/financial institutions in a gross abuse of process of law since on the same cause of action present petition has been filed before this Board. The petitioner has continuously tried to hurdle in the smooth functioning of Respondent company as well as to harm the reputation of Respondent No. 2 to 4 by repeatedly writing letter to the authorities. In view of this, approach of the petitioner, the Respondent request for an interim protection that the petitioner should not indulge in writing letters to various departments inspite of oral undertaking. In order to pressurize the Respondents into giving the unreasonable demands of the petitioners, the petitioner lodged a false complaint in various Police Stations including the complaint in Sivaji park Police Station, Dadar, Mumbai. The Respondents have been threatening the petitioner and her husband. The Sub Inspector of the aforesaid Police Station after conducting preliminary investigations found that Mr. Rajesh Shah and the petitioner have registered a false complaint against the Respondents. A copy of the letter dated 28.9.2003 has been placed on record. The Respondents have served notice of the Board meeting to the petitioner the petitioner filed FIR to defame the Respondent and create false evidence. The petitioner further amended the complaint under Section 406, 409 and 420 with a motive to claim cognizance the amended FIR relating to the issue of the sale of MFSC flat and DEPB license and non compliance of 292 and 58A of the Companies Act, 1956. The same allegations have already been filed before this Board. Despite pendency of the petition , the petitioner herself as well as through her relatives and friends is making attempts and with various forums. The petitioner/her relatives and friends a filed winding up petition being C.P. No. 283 of 2004 against the Respondent Company before the High Court of Mumbai. The same applicant has also filed application before District Forum Mumbai. Such behavior on the part of the petitioner is that interfering with imparting of justice and is a abuse of process of law. The Petitioner is guilty of "Forum Shopping" and the petitioner does not deserve a hearing of the grievances in the petition, especially when the petitioner has invoked the equitable jurisdiction of this Board. Even after the assurance given by the counsel for the petitioner, the petitioner has written 3 letter dated 19.3.2004 and 2 letter dated 12.4.2004 which have been placed on record. A conduct of the party has to taken into account as has been held in Srikant Dutta Narasimharaja Wadiyar v. Sri Venkatesivara Real Estate Enterprises (Petition) Ltd. reported in (1991) 71 Comp Cases 211(Kar.). In the said matter, Karnataka High Court held that relief will be refused if the real purpose of the petitioner is to obtain payment owned by the company or to force the directors to accept their views. It is submitted that as enumerated above, by her conduct the petitioner has disentitled herself from being granted any equitable relief.
15. The Learned Counsel for Respondent further submitted that she has been actively involved and has participated through her husband in the management of financial affairs of the company. Being a CA by profession and advising Respondent No. 2 to 4 and various groups concerns and companies on various and financial matters from the year 1991, the husband of the petitioner, Mr Rajesh Shah was desirous of investing money in the company. Accordingly, Mr. Rajesh shah through his wife (the petitioner) invested in Respondent company wherein the petitioner alongwith Respondent no 2 & 3 were the original promoters since Mr. Rajesh is a practicing CA, he could not be appointed as full time director and accordingly her wife (the petitioner) was put into forefront from the day of inception of the company, Mr. Rajesh Shah was looking after the accounts of the company as well as dealing on behalf of the company with various financial institutions, banks and Govt. Departments.. In fact the petitioner being the director has also executed a power of attorney in favour of her husband to represent Respondent company before various authorities/financial institutions. It is evident form the various documents. The petitioner and her husband were fully involved and had knowledge of day to day affairs and management of the Respondent company. The latter 28.4.2001 addressed to senior accountant of Respondent company has been signed jointly by the petitioner and her husband Mr. Rajesh Shah whereby they are confirming that they were incharge of the account of the Respondent company. The Chartered Accountant certificate has been issued by Mr. Rajesh Shah the correspondence on behalf of Respondent company MFSC- all the letters have been signed by Mr. Rajesh Shah. Mr. Rajesh Shah has singed as director at number of various occasion addressed on behalf of Respondent Company including correspondence with Corporation Bank. Mr. Rajesh Shah has participated in managing the affairs of the Respondent Company as late as in February 2001 and the letters were addressed by Mr. Rajesh Shah on behalf of Respondent company to other authorities including Income tax Provident Fund Sale tax etc. All these documents have been placed on record which indicate and show that the petitioner along with her husband has been involved in the financial affairs of the company till the year 2001. Thus the claim of the petitioner of no participation in the management is totally incorrect. The Learned Counsel for Respondent to press this point relied in the matter of Srikant Dutta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (pvt.) Ltd. & Ors., 1991 (72) Comp Cases 211 (KAR) Karnataka High Court stated as follows:-
"It is well- settled that the relief under sections 397 and 398 of the Act is an equitable relief which is entirely left to the discretion of the company court...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 the parallel proceedings in the civil courts and in other civil litigations in other courts......
31....Even assuming that the allegations of the petitioner, if proved, do make out a case of oppression and mismanagement within the scope of Section 397 and 398 of the Act, mere proof of those allegations would not entitle the petitioner to the reliefs sought for when these reliefs are discretionary reliefs and they will be granted only to persons who approach this Court in good faith and the parties who approach this Court for equitable reliefs must come with a clean recent I do not go to the extent of accusing the petitioner for not approaching this Court with clean hands, but I am satisfied that the petitioner's earlier conduct borders on recklessness as he is prepared to disown his own obligations, his own documents for the sake of obtaining some advantage against his adversary. So, such a person should not be entitled to the reliefs under Section 397 and 398 of the Act." The Learned Counsel for Respondent also relied on the judgment in the matter of Palghat Exports Pvt. Ltd. v. Chandran (1194) 79 Comp Cas 213 Division Bench of the Kerala High Court while dealing with Section 397 held that when the court finds that a petition did not reflect a representative action but rather a method of pressurising the directors to pay what the petitioner thought, was owing to him, it is an abuse of the process of The court. The next judgment relied was in the matter of Desein Private Ltd. and Anr. v. Elektrim India Ltd. and Ors 2001 (3) Comp LJ 459 (CLB), wherein the company Law Board has held that while adjudicating upon the grievance of the petitioner regarding appointment of statutory auditors of the company as the ground of oppression/mismanagement was of the view that the petitioner in case were estopped from raising the said issue in the proceedings before the Hoard as the petitioner representative had participated in the appointment of the auditors and further the petitioners had never complaint about the said fact which was also approved in the subsequent Annual General Meeting's of the company, hence holding the petitioners equally, responsible for the violation, the Board decline to grant any relief on the said ground. The last judgment referred on this point is in the matter of Anugraha Jewellers Ltd. v. K.R.S. Mani (2002) 111 Comp Cas 501(Mad) Madras High Court held that "in case of a person seeking relief under Section 397 and 398 the petitioner must come with clean hands. His conduct must not be tainted failing which the court ought not to grant any relief in favour of such litigation".
16. The learned counsel for respondent in reply to the specific allegations submitted that the alleged misappropriation of sale price of DEPB licenses, the respondent company under export scheme was entitled to DEPB benefits in the form of DEPB licenses which can be sold in the market. The DGFT (Director General of Foreign Trade) had issued DEPB) licenses worth Rs. 20 lakhs. The respondent company had employed one Mr. Narayan Anavkar as an Export Officer who was required to deal with the export documentation. Mr. Anavkar cheated ascommitted fault upon respondent company by utilizing/selling of DEPV licenses worth approximately Rs. 20 lakhs. Subsequently it came to the knowledge of the respondent that out of the total amount of approximately Rs. 20 lakhs the ex-employee had unauthorisedly sold of licenses worth Rs. 8 lakhs, which as per the DGIT records had been utilized and balance licenses worth Rs. 12 lakhs could not traced. As soon as mishandling by the said employee came to the knowledge of the respondent, a complaint and FIR both dated 22.6.2000, was lodged with the local police for licenses worth Rs. 8 lakhs. In regard to the balance licenses of Rs. 12 lakhs, the respondent company filed an application for DEPB licenses in lieu of stolen licenses. The Director General of Foreign Trade vide its letter dated 22.6.2000 has informed the respondent company that committee had decided to approve the case and DGFT has issued four licenses giving the duly credit of total sum of Rs. 12,21,226. The FIR for DEPB licenses worth Rs. 8 lakhs has already been filed with the local police and after investigation, a charge sheet in respect of 16 DEPB licenses have been filed. Accordingly, the respondent company has taken all necessary steps for DEPB licenses.
17. The learned counsel for respondent further submitted that regarding breach of collateral security, the respondent company was sanctioned a term loan of Rs. 85.60 lakhs by MSFC against which the company had furnished security to the tune of 246% on term loan. The respondent company vide letter dated 1.12.99 had requested MSFC to release the collateral security viz. residential premises at Andheri Mumbai. Apart from other properties submitted to the said financial corporations. Subsequently, MSFC released machinery worth Rs. 33.42 lakhs that was given as collateral security for the said loan. Thus anticipating that residential property would also be released by MSFC and being under the impression that flat was available for sale without encumbrances, the flat was sold by respondent No. 3 as the flat belongs to him and was not owned by respondent company. Since term loan advanced by MSFC was adequately secured by other properties/guarantees, the said financial corporation did not issue any letter of recovery nor threaten to recover the term loan. It is on the persistent letters written by the petitioner to harass the respondents that MSFC sought substitution of collateral security of the residential flat and agreed to release the residential flat on the condition that respondent company deposits Rs. 15 lakhs in a fixed deposit. The said amount was deposited and MSFC vide their letter dated 2.1.03 release the said flat from the charge of the corporation. The financial corporation has graded the respondent company as being one of the best clients amongst its borrowers.
18. The leaned counsel for respondent dealing with transfer of Rs. 20 lakhs to the personal account of Respondent No. 2 submitted that a sum of Rs. 20 lakhs was transferred only for two days in order to prepare a letter for visa to be issued to one of the relative of respondent No. 2. The said amount of Rs. 20 lakhs was immediately transferred back immediately within a period of two days to the company. The respondent submitted that this transaction was done purely on the advice of the husband of the petitioner Mr. Rajesh Shah.
19. The learned counsel for the respondent submitted that the alleged diversion of business to M/s Vardhman Buildcon Pvt. Ltd. has been explained, in the reply to petitioners application under Sec. 543 of the Companies Act. The respondent company is under the deferred scheme of the sales tax and endeavor has always been to extract maximum benefit out of the scheme. The respondent company has, received such a scheme for Rs. 60.46 lakhs. Under the said scheme, deferred liability of sales tax is for a period of 12 years as most of the products of the respondent company are exported and sales tax cannot be levied on such exports, M/s Vardhman Buildcon Pvt. Ltd. helped respondent No. 1 company . In order to avail benefit of scheme, Vardhman Buildcon Pvt. Ltd exports respondent company's products resulting in a local sale for respondent company and accordingly sales tax is charged to Vardhman Buildcon Pvt. Ltd. Subsequently, Vardhman Buildcon P. Ltd. pays sales tax refund to respondent company. At the expiry of 12 years respondent company is required to pay all the sales tax collected during the period of 12 years to the concerned authority. Thus respondent company can utilize amount collected as sales tax for a period of 12 years without any additional cost. The respondent company was opined by advocate Balbhadra C. Joshi Sales Tax Expert that respondent company could route transactions through Vardhman Buildcon instead of directly exporting it as it would entitle respondent company to the sales tax benefit. This company was formed in 1991 and was not carrying out any transaction and Mr. Rajesh Shah was also the auditor of this company i.e. Vardhman Buildcon Pvt. Ltd. This company has always remitted the sale proceeds to respondent company in respect of the exports undertaken on its behalf. The respondent company while billing to Vardhman Buildcon Pvt. Ltd raises invoices at a rate i.e. inclusive DEVB rate. Thus the sale prices of DEPV licenses are included in final value of goods sold. Thus the purchase value by Vardhman Buildcon to respondent company has always been more than the sale amount indicating that value of DliPli licenses has also been passed on to respondent company 2nd not retained by Vardhman Buildcon as alleged by the petitioner.
20. The learned counsel for respondent dealing with diversion of companies business to M/s Vardhman Impex Pvt. Ltd. submitted that the respondent company has never sold goods to M/s Vardhman Impex Pvt. Ltd. However, during the financial difficulty, this company helped respondent company in getting their bills discounted. Subsequently, when Vardhman Impex Pvt. Ltd was undergoing financial problems the bank debited respondent company's account of approximately 13 lakhs realized on discounted bills, which was very much within the knowledge of the petitioner and her husband as can be seen from the schedule to the balance sheet. In this document, under the category of loans and advances, and amount of Rs. 13 lakhs approximately is shown as loan advanced to M/s Vardhman Impex Pvt. Ltd. Apart from other directors the petitioner has also signed the balance sheet. It was also decided amongst the directors that since Vardhman Impex Pvt Ltd has helped respondent company in hour of need, no interest will be charged on said amount and the petitioner confirmed by signing the Director's report for the year 1999-2000. Thus, the petitioner was aware of these transactions and cannot be allowed to raise the said issue in the present petition. The respondent have already received a total sum of Rs. 6,33,483.11 towards return of amount loaned by responded company to the said M/s Vardhman Impex P. Ltd.
21. The learned counsel for respondent dealing with allegation of unsecured loan advance to M/s Deepak Enterprises submitted that respondent company apart from taking loan from financial institutes had also taken unsecured loans from various lenders and M/s Deepak Enterprise was one of them. This grant of loan was very much within the knowledge of the petitioner which is evident from the schedules to the balance sheet enumerating therein unsecured loans advanced by various individuals/companies and this balance sheet has been signed by the petitioner. The allegation of the petitioner that respondents Nos. 2 to 4 have not disclosed that they have an interest in this company i.e. M/s Deepak Enterprise. This company is only owned firm of the Dharod Group which was very much within the knowledge of the petitioner as prior to formation of the respondent company, Mr. Rajesh Shah husband of the petitioner, being a practicing Chartered Accountant was handling the private affairs of the Dharod Group and their other holding companies. For the purpose of seeking additional term loan from MFSC required for respondent company, M/s Deepak Enterprises has been mentioned as one of the associate concerns and three directors of Dhara Groups stated to be partner in the said firm. Thus, contrary to the claims made by petitioner, all along she and Mr. Rajesh Shall have been aware of all the associate concern of Dhorod Group and because certain disputes have arisen between the parties, the same cannot be raised as a ground of alleged oppression/mismanagement by the respondent.
22. The learned counsel for respondent further submitted that it is a settled law in a petition under Section 397 alleging oppression by n minority shareholder, before considering grant of any relief the court has to form an affirmative opinion in terms of Section 397(2)(a) and (b) i.e. the affairs of the company are being conducted in a manner oppressive to petitioner and the winding up of the company on just and equitable ground is warranted.
23. The learned counsel relied on the judgement of Hon'ble Supreme ('mill in the matter of Shanti Prasad Jain v. Kalinga Tubes Ltd. 1965 (35) Comp Cas 351; AIR 1965 Supreme Court 1535 wherein it is held that the law has not defined the expression, "oppression for the purpose of Section 397 and unless the court decides on facts of each case that there is oppression calling for action for such oppression, the order would not be made. The second judgement relied on the consideration of scope of Section 397/398 of the Companies Act is in the matter of Mohanlal Ganpatram and Anr. v. Shri Sayaji Jubilee Cotton and Jute Mills Co. Ltd. and Ors. AIR 1965 Gujarat 96 wherein it is held that the only question which the court is concerned in a petition under Section 397/398 is whether the action of the directors - whether within the law or outside the law - is oppressive to the minority shareholder or is prejudicial to the interest of the company-----------." The next judgment relied in the matter of Vinod Kumar Mittal v. Kaveri Lime India Ltd. 2000(2) Comp. LJ 354 (CLB), Company Law Board declined to interfere with the removal of the Director as an act of oppression since it was established that the petitioner had acted against the interest of the Company by writing complaints to various Govt. Authorities resulting in their conducting raids on the company.
24. The next judgment relied is in the case of In Re Bengal Luxmi Cotton mills Ltd. (1965) 35 Comp Cas 187, Calcutta High Court held that in order to prove oppression and mismanagement, it is not enough to allege that the company's affairs are being conducted in such a manner that a winding petition order would be appropriate but it must be shown that such an order would unfairly prejudice to the applicant or ether members.
25. The other judgments relied on in the matter of Hind Overseas Pvt. Ltd v. Raghunath Prasad Jhunjhunwalla (1976) 46 Comp Cases 91, 104: (1976) 3 SCC 565, the Hon'ble Supreme Court observed that there must be materials to show when 'just and equitable clause is invoked, that it is just and equitable not only to the persons applying for winding up but also to the company and to all its shareholders. The company court will have to keep in mind the position of the company as a whole and the interests of the shareholders and see that they do not suffer in a flight for power that ensues between two groups.
26. The last judgement relied upon by the learned counsel for the respondent in the matter of Hanuman Prasad Bagri and v. Bagri Cereals (P) Ltd. and Ors. 2001(2) Comp. LJ 392 (Supreme Court.) has held that an order could be made on an application filed under Section 397 if the court is of the opinion:
1. that the company's affairs are being conducted to a manner prejudicial to public interest or in a manner oppressive of any member oppressive of any members; and
2. that the facts 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, and
3. that the winding up order would unfairly prejudice the applicants.
27. The learned counsel for respondent submitted that no case has been made out by the petitioners that company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to the member or members and that the facts 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, and that the winding up order would unfairly prejudice the applicant. The petitioner herself through her husband Mr. Shah has been actively involved in the financial affairs of the respondent company. At a time when relationship between the" two group has soured the petitioner cannot be allowed to raise the issue of action/inaction when the action/inaction when the petitioner was also party to the decisions. As a party to the decision the petition at a later stage cannot invoke equitable jurisdiction on the basis of same very actions/decisions. Accordingly, the petitioners have not made out any justifying grounds and the respondent submitted that the petition should be dismissed with costs.
28. I have considered the pleadings and arguments of learned counsel of both sides. There are only four major issues need to be looked into.
1. Breach of collateral security given to MSFC.
2. Alleged misappropriation of Sale price of DEPB licenses
3. Diversion of company business to M/s Vardhman Impex Pvt. Ltd
4. Allegation of unsecured loan and advances.
29. Before the above four issues are discussed it is pertinent to go into the allegation of forum shopping made by respondents . The respondents have alleged that the petitioner has been continuously trying to put hurdles in the smooth functioning of the respondent company and had been writing repeatedly letters to various authorities to harm the reputation of the company like Corporation Bank, Financial Institutions, MSFC, Registrar of Companies, Excise Deptt. Customs Deptt. and Income Tax Deptt. etc.
30. It seems that everything was going well till Mar. 2001. Perhaps there was some mutual talk/agreement between the parties that the petitioner will be relieved from the company by Mar. 2001. This is evident from the first letter written by the petitioner alongwith her husband and signed by both. The petitioner has very clearly mentioned in para 2 of the letter that they have requested the respondent on several occasions to amicably settle their accounts and also to take over 28% holding or the company at a justifiable price. However, this matter was not resolved. Thereafter the petitioner has been writing letters to various forums and even filed criminal cases and this very letter the petitioner had mentioned that they will be constrained to take legal action if the respondent company continue to torment them. This letter has been signed by both husband and wife. The petitioner had lodged complaints in various police stations including the complaint with Shavaji Park Police Station, Dadar, Mumbai that the respondents have been threatening the petitioner und her husband. Allcr investigation the police station wrote a letter on 28.9.03 stating that they feel that due to certain circumstances it is found that Mr. Rajesh Shah and Mrs. Mancesha Shah have registered a false complaint against respondent. It is therefore clear that the petitioner has been writing to various forums and the husband Mr. Rajesh shah had been working on behalf of the petitioner actively and participating the affairs of the company. He had been representing various group companies on tax and financial matters form the year 1991. Again a letter dated 28.4.2001 was written by both the petitioner and her husband to the senior accountant of the company stating that they had been earlier regularly informed about the accounts data entry position, production, sales etc and were seeking their advice. But of late, the senior accountant informed them about their accounts and seeking their advice. This clearly indicates that the petitioner and her husband were actively participating the affairs of the company till Mar. 2001. The respondents have also placed on record various letters signed during 1998-1999 by Mr. Rajesh Shah, the . husband of the petitioner to MSFC as well as the Corporation Bank. This indicates clearly that both the petitioner and her husband were fully involved in the affairs of the company. He has even written to Income Tax Authorities in Oct. 1999 in his capacity as Chartered Accountant on behalf of the respondent company. Therefore, the contention of the petitioner that they were not aware of the affairs of the company does not hold good. 1 am inclined to accept the version of the respondent that the petitioner had been indulging in "forum shopping" after the company did not oblige them to purchase their 28% share on their terms. 31. Having said so I proceed lo examine the major issues raised in the petition and mentioned above. As regards first question of alleged breach of collateral security given to MSFC, the respondents have stated that they had requested MSFC to release the collateral security, Andheri, Mumbai apart form to her properties. Subsequently, MSFC released machinery worth Rs. 33.42 lakhs which was given as collateral security for the said loan. Thus anticipating that residential property would also be released by MSFC and being under the impression that the flat was available for sale, the flat in question was sold by respondent No. 3. This action on the part of respondent company was not correct. They should not have, breached the collateral security without getting clearance from MSFC and in anticipation.
32. Regarding alleged misappropriation of sale price of DEPB licenses, the respondent company has submitted that one of the employee has cheated them and they have already filed complained an FIR on 22.6.2000 with the local police for licenses worth approx. Rs. 8 lakhs. Subsequently, DGFT has issued four licenses giving a duty credit of a total sum of Rs. Approx. Rs. 12 lakhs on the remaining DEPB licenses. The charge sheet in respect of stolen licenses has been filed and matter should rest for natural course of action to be taken under the law.
33. Coming to the third point of diversion of company business to M/s Vardhman Impex P. Ltd, the respondent company has explained that they have received deferred scheme of sales tax for Rs. 60.46 lakhs . Under the scheme the deferred liability of sales tax for a period of 12 years . The company started routing their export products through Vardhman Buildcon Pvt. Ltd. for claiming refund of sales tax. After the expiry of 12 years the respondent company is required pay all the sales tax collected during the period of 12 years to the concerned authority. The company has explained that this action was taken on the advice of sales tax expert that the respondent company could route through transactions through Vardhman Buildcon P. Ltd instead of directly exporting as it would entitled respondent company to the sales tax benefits. The respondent company has also submitted that the petitioner was well aware of these transactions and it was on the advice of Mr. Rajesh Shah, husband of the petitioner that this course of action was taken. 1 am not going into the aspect whether such a transaction on the exports for taking sales tax exemption is within the purview of sales deptt or not.
34. Dealing with the last allegation of unsecured loans and advances to M/s Deepak Enterprises. The respondent company has stated that it is well within the knowledge of Rajesh Shah who was Chartered Accountant on the said M/s Deepak Enterprises since 1991-98 that this company is wholly owned firm of the Dharod Group. The respondent company has been taking unsecured loan from various lenders and M/s Deepak Enterprises was one of them. It was conscious decision of the management and was known to the petitioner as the petitioner has signed the relevant balance sheet of those years.
35. There is another allegation of transfer of Rs. 20 lakhs to the personal account of respondent NO.2 for a period of 2 days. The respondents have stated that in order to prepare a letter for visa to be issued to one of the relatives of respondent No. 2 a sum of Rs. 20 lakhs was transferred to the personal account of respondent No. 2. The said amount of Rs. 20 lakhs was immediately transferred back within a period of two days to the company. This is obviously misuse of finances of the company for the personal use of one of the directors.
36. I find that the petitioner has been indulging in forum shopping and she was aware of everything happening in the company till the dispute arose after March, 2000. Now when the relationship in the two groups have soured, the petitioner has raised various issues of action/inaction on the part of respondents alleging that the affairs of the respondent company arc being conducted in a manner oppressive to the petitioner. The petitioner was a party to all these decisions and operating through her husband. She cannot turn back at a later stage to invoke equitable jurisdiction on the basis of certain decisions taken by the respondent company. Although some of these decision like transferring of Rs. 20 lakhs to the personal account of a particular director for two days, diversion of companies export business through another company of the respondent directors for saving sales tax etc as well as selling the flat which had not been released out of the collateral security, are some of the actions which are apparently wrong on the part of the respondent company. The concerned authorities like Registrar of Companies would take note of these omissions and not adhering to the provisions of the Companies Act and take suitable action against the company. However, no case of oppression to the petitioner is made out by merely some wrongful actions taken by respondent company as mentioned above.
37. In view of the above discussions, the petition is disposed of with the following directions that in order to end the dispute, the petitioner should be given liberty to sell his shares and go out of the company on return of his investment in shares, as she feels oppressed by the majority share holders. In case, the petitioner is willing to part with her shares, the shares will be bought by the respondent at the fair price to be fixed by a valuer to be appointed by this Board. The valuation will be based on the balance sheet of the respondent company as on 31.3.2001. In case the petitioner desires to go out of the company, then on an application made by her, a suitable valuer will be appointed by this Board in consultation with both the parties.
38. There are no orders to cost.