Company Law Board
Shri Rahul Shah, Mrs. Binita R. Shah, Ms. ... vs Avi Sales Pvt. Ltd., Shri Naran R. Kadia, ... on 7 June, 2007
Equivalent citations: [2008]141COMPCAS505(CLB), (2008)1COMPLJ517(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 19/2005 filed by Shri Rahul Shah and Ors under Sections 397 and 398 of the Companies Act, 1956 (hereinafter called 'the Act') alleging certain acts of oppression and mismanagement in the affairs of the R-1 by the respondents.
2. The undisputed facts of the case are: The respondent company, namely M/s AVI Sales Pvt. Ltd. was incorporated on 2.11.1998 as a private limited comany with its Regd. Office at 609, Wallstreet, Opp. Orient Club, Nr. Gujarat College, Ellisbride, Ahmedabad-6. The authorised share capital of the R-1 company is Rs. 1,00,000/-comprising of 10000 equity shares of Rs. 10/-each. The main objects of the respondent company is to undertake and carry on the business in India and elsewhere, buy, sell, resale, service, and to act as agent, broker, stockists, manufacturer's representative, supplier, distributors, wholesalers, dealers, consignment agents, handling agents, consignors, consignees, and of any brand and of all classes, kinds and types of textile and ginning machineries, engineering goods, crop cutting and processing machineries, thrashing machineries, and to deal in all types of parts, accessories, components, devices, tools, fittings, tackles, substances of such machines and to carry on the agency business of all types of machineries of any description, specifications, characteristics, applications land uses.
3. Shri Vibhu Bakru, Counsel for the petitioners argued that it has been held by this Hon'ble Board and various High Courts in a catena of cases that when powers are used merely for an extraneous purpose and not in the interest of the company but to gain control over the affairs of the company the same cannot be upheld. In the instant case the share capital was increased only with a view to reduce the Petitioners into minority. Also, no legal procedure was followed for such increase and allotment of such shares to the Respondent group. It was pointed out that the Respondent company was formed by the Petitioners and the Respondent Nos. 2 & 3 and their family members with the Petitioner group having 51.40% of the authorised and paid up share capital. The Respondents with the only view to reduce the Petitioners into minority increased the share capital of the Respondent company and allotted to themselves such shares without notice to the Petitioners or other shareholders of the Respondent company. It was argued that it is a settled position of law that reducing majority shareholders into minority amounts to oppression. It was contended that the Respondents have failed to produce a single document/proof on record to show that the due legal procedure was followed for removal of the Petitioner No. 1 as the Director of the Respondent No. 1 company. There has neither been a requisition, nor a special notice for removal of the Petitioner No. 1. No Board meeting and Extra Ordinary General Meeting took place wherein the Petitioner No. 1 has allegedly been removed as Director. It was only on 24th March 2003 that the Petitioner No. 1 came to know about his alleged removal through an advertisement in the newspaper.
4. The Counsel for the petitioners pointed out that the Respondent Nos. 2 and 3 have incorporated the Respondent No. 4 company and all business and funds of the Respondent No. 1 company is being diverted to the said Respondent No. 4 company. It was pointed out that recently the Respondent Nos. 2 and 3 have floated another company namely, Deligent Ginning Machinery (P) Ltd. All these companies are using the premises and infrastructure of the Respondent No. 1 company and the funds are being siphoned off to these companies. My attention was drawn to the Bench Officer's report wherein he had pointed out that there was no sign board of the Respondent No. 1 company. No statutory records were available and only unsigned computer prints alleged to be the Board minutes were shown to him for authentication. The minutes have not been kept in the manner prescribed under Section 193 of the Act. The report also states that the Petitioner No. 1 who is admittedly a shareholder of the Respondent No. 1 company was threatened and not allowed to enter the premises. It was argued that the said act of the Respondents is in violation of Section 163 of the Act.
5. Further, it was argued, that the Respondent No. 1 company has opened new bank accounts in violation of order dated 18th May 2005 and been receiving payments in the said account in violation of the order passed by this Hon'ble Board. My attention was drawn to the Petitioners' application seeking initiation of contempt proceedings against the persons responsible for the same.
6. Furthermore, it was argued that the Respondents with an intention to strip the Respondent No. 1 company of its assets and to enrich other entities controlled by them, have been transferring, alienating the funds, assets, plant and machinery, stocks, etc., to the Respondent No. 4 company and other entities controlled by them. The quantum of diversion of funds was shown by referring to the bank statement, sales and purchase register, register of contracts and delivery vouchers/challans of the Respondent No. 1 and Respondent No. 4 companies. It was argued that this Hon'ble Board has held that any payment which is not for the purpose of the business of the company, the concerned directors of the company are personally responsible to make good the payment. The counsel for the petitioner relied on the case laws reported at (1992) 3 Comp LJ 89; (1998) 5 Comp LJ 463; (2006) 6 Comp LJ 161; (2002) 6 Comp LJ 423; (2002) 110 Comp Cas 31; (1997) 3 Comp LJ 321.
7. Shri Alok Dhir, Counsel for the respondents replying to the allegation that the Respondent Nos. 2 and 3 have illegally raised the paid up share capital of the Respondent No. 1 company without passing Special Resolution under Section 81(1 A) of the Act, pointed out that the Respondent No. 2 and 3 have illegally raised the paid-up share capital of the Respondent No. 1 company without passing Special Resolution under Section 81(1A) of the Companies Act, pointed out that the Respondent No. 1 company was, in fact, formed with the tacit understanding that all three promoters, viz., Mr. Rahul Shah, Mr. Devang S. Shah and Mr. Naran R. Kadia would be equal shareholdings. The subscription clause of Memorandum of Association also depicts the equal proportion of subscription at the time of incorporation. When the Respondent No. 1 company was in the process of implementing the project, it was agreed to by all the three promoters to transfer the land belonging to AVI Trading (a partnership firm of Petitioners) to Respondent No. 1 company. Since the transfer entailed payment of transfer charges, it was suggested by Petitioner No. 1 himself that if the shareholding of his wife (Mrs. Binita Shah) is increased to 51%, no transfer charges would be levied. Accordingly, it was decided to grant the Petitioner No. 1 and his family 51% shareholding with a tacit understanding that the shareholding would be reverted back to 33.33% for each of the promoters / Directors immediately after the transfer of land in the name of AVI Sales Private Limited. The land was, in fact, transferred in the name of AVI Sales Private Limited on 18th February 2002. Immediately after such transfer, there was a meeting for issue of shares in favour of Respondent No. 2 and Respondent No. 3. The Petitioner No. 1 was very much party to such meeting. Allotment of shares is governed by Article 6 of Articles of Association and not by Section 81(1A) of the Companies Act, 1956 as the provisions of Section 81(1A) is applicable only to public limited company. The shares were issued in favour of Respondent No. 2 and 3 and the Petitioner was also in full knowledge of the same from August 2002, in terms of his own admission in the Petition. After the issue of shares in favour of Respondent No. 2 and 3, the shareholding of each of the directors was restored to 33.33%. The issue of shares in favour of Respondent No. 2 & Respondent No. 3 was during May 2002. After that more than three years have passed. No objection whatsoever was raised by the Petitioner No. 1 in relation to increase of capital. Now, it was argued, for the reason best known to him, he has raised this untenable issue of illegal share allotment. My attention was drawn to the correspondence which the Petitioner No. 1 has attached to the Petition at pages 73 to 77. In none of those letters, it was pointed out, has he raised the issue of fresh allotment. Accordingly, he has very much consented to the issue of such shares to the respondents. If at all Respondent No. 2 No. 3 were to have ill motive, it was argued, they could have ensured that the Petitioners are reduced to hopeless minority. That shows credibility of the Respondents vis-a-vis Petitioners. It was argued that the allotment was made with the consent of the Petitioner No. 1.
8. As regards the Petitioner's removal as Director of the AVI Sales Private Limited without his knowledge and Notice, the counsel for the respondents contended that the Petitioner No. 1 was very much aware of his removal. In fact, Petitioner No. 1 was served with the Notice of the Extraordinary General Meeting to be held on 13th January 2003 on 4th January 2003. On 13th January 2003, the Petitioner No. 1 was to be removed. Since the Petitioner No. 1 himself has admitted receipt of this notice, he could have approached the CLB in January 2003 itself. However, he did not do so. The Petitioner was not removed in the general meeting held on 13th January 2003. A fresh Notice of Board Meeting was issued on 10th February 2003 by Registered Post, in which it was clearly mentioned that the meeting of Board of Director will be held on 20th February 2003 for considering the Notice of removal of a Director. This Notice was also received by the petitioner. It was argued that the Petitioner could have moved to CLB even after receipt of this Notice. After the board meeting, the Notice for Extraordinary General Meeting to be held on 20th March 2003 was served on the Petitioner No. 1. The said Notice envisaged removal of Petitioner No. 1 from the Directorship. The Petitioner has denied receipt of this notice as the same was served under Certificate of Posting. It was argued that the Petitioner admits the receipt of notices that suits him and rejects that does not. In any event, he was in full knowledge of his removal from 4th January 2003, when the first notice of his removal was received by him. The receipt of notice of EGM has been confirmed by the Petitioner. It was argued that it is atrocious to say that the Petitioner was not aware of his removal. The Petitioner No. 1 had complete knowledge of his removal and after Respondents letter dated 31st May 2003, he never entered into any correspondence. After a gap of nearly two years, the Petitioner has raked up this case, which is nothing but a method to put pressures on the judicial system and the Respondents. It was argued that the Petitioner No. 1 was legally removed and he was fully aware of his removal.
9. As regards the allegation that the business of Respondent No. 1 company is being diverted to Respondent No. 4 company and Respondent No. 4 is treated as an associate of Respondent No. 1 company, it was argued by the counsel for the respondents that it is a baseless allegation, raised by the Petitioners as a retaliatory action against the case filed by the Respondent No. 2 and 3 in Gujarat Courts. In that case, the Respondent No. 2 and 3 have alleged that a sum of Rs. 40 Lacs has been illegally siphoned off by the Petitioner No. 1 from Respondent No. 1 company. The case is sub-judice. The Gujarat Court, after hearing the parties has directed the bank to keep the amount in Fixed Deposit. The Petitioner No. 1 was, therefore, it was pointed out, not allowed to achieve his ulterior motive. It was admitted that the Respondent No. 4 is very much an associate company of respondent No. 1 company. No business of the Respondent No. 1 company has been diverted to Respondent No. 4 company. Rather it is Respondent No. 4 company that has advanced a sum of Rs. 21.78 Lacs to Respondent No. 1 company. It was pointed out that the contrary, the Petitioner No. 1 himself is running two units by the name of AVI Trading and AVI Engineering Private Limited. He has been diverting the business of the Respondent No. 1 company even while he was a Director of Respondent No. 1 company. The Petitioner No. 1 was removed only because of his lack of probity in financial dealings vis-a-vis Respondents. In fact, the export order received by AVI Sales private Limited was executed based on the Agreement, when the amount was received in the name of AVI Trading, the petitioner siphoned off the money without rendering account to Respondent No. 2 and 3. It was due to timely intervention of Respondent No. 2 and 3 that the amount of Rs. 40 Lacs could be retrieved.
10. Further, as regards the petitioner's allegation that the company is maintaining two sets of Minutes, one signed and other not signed, the counsel for the respondents pointed out that the Respondent No. 1 has only one Minutes of Board Meeting, which is duly signed. The unsigned minutes was given to the Bench Officer, who visited the registered office of the Respondent No. 1 company without any notice. It was explained that the Order for authentication was given by Hon'ble member on 10th March 2006 and the Bench Officer was at Ahmedabad on 12th March 2006 that too without any notice. Since none of the Directors were present at Ahmedabad, the bench officer himself had advised taking printouts of the Minutes from the Computer. The unsigned Minutes was, basically, a computer printouts. The report of the Bench Officer, is clear on this aspect. Besides, a copy of the signed Minutes was also sent to Petitioner No. 1 on 24/9/2005. The Bench Officer has also given a revised report, which may be relied upon. The counsel relied upon a judgment of Kerala High Court in M.F.A. Nos. 96 and 104 of 1981, decided On: 18.10.1982 in the matter of V.J. Thomas Vettom and K.M.J. Joseph and Anr. v. Kuttanad Rubber Co. Ltd. and Ors., wherein the learned judge, Shri V. Khalid and G. Balagangadharan Nair, JJ. observed as under:
The fact that the complaining parties were themselves participants in the alleged activities will be one of the factors to dissuade the court from exercising its powers under the section. Delay and acquiescence in the acts complained of will also be circumstances against the grant of reliefs. The powers of the court under Section 402 are wide. But the courts have always exercised restraint in interfering with the affairs of the company, for the affairs of the company are normally its own concern and the concern of its shareholders.
11. Further, it was argued that the Petitioner No. 1 himself was a wrong doer. He was running two parallel units in the name of AVI Trading and AVI Engineering Private Limited, while he was a Director of Respondent No. 1 company.
12.I have considered the pleadings and the documents filed therewith as well as arguments of the parties. I find that this petition is a counter blast to the R-2 and R-3's filing of cases against the petitioner in the Court in Gujarat alleging illegal siphoning off of Rs. 40 lakhs by the petitioner. The matter is sub-judice wherein the Court after hearing the parties has directed the bank to keep the amount in fixed deposit. The respondents have raised preliminary objections that the petitioner has not come with clean hands and that there is delay in filing this petition. It has been argued that the petitioner has given his consent and has also acquiesced to the increase in the shareholding, the petition is not maintainable at the threshold itself. On consideration of the facts and circumstances of the case and the catena of judgments relied upon by the counsels, I find that the preliminary objections raised by the respondents are tenable. It is an admitted case that the issue of shares in favour of R-2 and R-3 was made during May 2002, for more than 3 years the petitioner did not raise any objection, whatsoever, in relation to the increase of the capital and further issuance thereof. The petitioner had several occasions to register his complaint or grievance about this but it was not done as is evident from the correspondence adduced by the respondents for that period. This issue has been raised for the first time by way of filing this petition under Section 397 and 398 of the Act in Feb. 2005. No justification, whatsoever, has been given by the petitioner for the delay in filing the petition. It is true that the provisions of the Limitation Act 1963 do not apply to the proceedings of this quasi-judicial authority which, as per the provisions of Section 10E (5) of the Companies Act, 1956 "shall in the exercise of its powers and the discharge of its functions under the Act or any other law be guided by the principles of natural justice and shall act in its discretion." Of course, latches do apply. The petitioner is guilty of latches in this case. As regards the other preliminary objection relating to the unclean hands of the petitioner, I find that the respondents have made their case that the petitioner has not come with clean hands in this case. Further, I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn): (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It is true that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers"...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands." In the present petition the respondents have succeeded in proving the unclean hands of the petitioner. The petitioner himself being a wrong doer is not entitled to any relief and it is settled law that the CLB may refuse to grant relief where the petitioner does not come to the court with clean hands. Thus, I find that the petition is not maintainable even on the basis of the preliminary objections raised in this case.
13. However, considering the case on merits, I find that the respondents are right in contending that the provisions of Section 80(1 A) are not applicable to this case and that the removal of the petitioner as director has been as per the compliance with the law. The petitioner was very much aware of his removal, he was served with the notice of EGM on 13.1.2003. However, the petitioner was not removed in the meeting on 13.1.2003 and a fresh notice of Board Meeting was issued on 10.2.2003 by Regd. Post duly informing that the Board of Directors would be meeting on 20.2.003 for considering the notice of removal of the petitioner. This notice was also received by the petitioner. Thereafter, the notice of EGM on 20.3.2003 was served on the petitioner envisaging his removal from the directorship. Though the petitioner has denied the receipt of this notice served under Certificate of Posting, the circumstances of this case make it amply evident that the petitioner was in full knowledge of his removal from 4.1.2003 when the first notice of his removal was received by him. However, even if the petitioner's contention is believed to be true that the last notice sent under Certificate of Posting was not received by him an action in contravention of law may not per se be oppressive. The CLB, however, will have to consider the entire materials on record and the totality of the circumstances of the case. Otherwise too, the directorial complaints cannot be entertained in a petition under Sections 397 and 398 of the case and particularly so when the petition already stands dismissed on account of preliminary objections. As regards the other allegation when considered on merits in the petition pertaining to the increase in the shareholding, the petitioner had failed to make out a case that the petitioner groups' shareholding has been reduced from 51.40% to 33.33%, that it has been made with merely for an extraneous purpose and not in the interest of the company but to gain control over the affairs of the company. Rather it is a case where the petitioners' had themselves consented, though a tacit consent, to revert back their shareholding to 33.33.% for each of the promoters/directors from 51% immediately after the transfer of land (belonging to AVI trading a partnership firm of petitioners) in the name of AVI Sales Pvt. Ltd. i.e. the respondent No. 1 company to get over the hassles and to override the provisions of liability of transfer charges. Thus, even this allegation of petitioner fails on account of their consent and acquiescence as this transfer and reduction in share was done on 18.2.2002 and this petition has been filed in Feb. 2005. As regarding the only other allegation of maintaining two sets of Minute Books of Meetings, the CLB's Bench Officer's report explains it all. The unsigned minutes were basically a computer printout taken in the absence of directors. The petitioners have failed to make out a case even on merits.
14. In view of the foregoing, I find no reason to allow the petition. The petition is hereby dismissed. All interim orders stand vacated. All CAs stand disposed off. No order as to cost.