Company Law Board
Dr. Ashok P. Arbat vs Ketki Research Institute Of Medical ... on 9 March, 2007
Equivalent citations: (2007)2COMPLJ508(CLB)
ORDER
Vimla Yadav, Member
1. Company Petition No. 106/2003 under Sections 397and 398 of the Companies Act, 1956 (hereinafter to be referred to as 'the Act') has been filed by Dr. Ashok P. Arbat the petitioner who is one of the two subscribers to Memorandum and Articles of Association and the Promoter of the respondent company previously known as Ketki Research Institute Medical Sciences Pvt. Ltd. which was incorporated on 3.3.1993 and later converted into a public limited company with effect from 18.4.1995. In this company petition, the petitioner has alleged his illegal removal as CMD of the company; his illegal removal/vacation of office as director of the company under Section 283(1)(g) of the Act; illegal allotment of 70,000 equity shares to the respondent Nos. 2,3 and 4; non maintenance of requisite statutory records; mismanagement of the affairs of the company by a close coterie without any transparency their acts being detrimental to the interest of the company's shareholders and public at large. The petitioner has prayed CLB to pass such orders to relieve the company from the mismanagement, oppressive, harsh and unreasonable conduct of the respondents and to stop such acts of the respondents which are prejudicial to the interest of the shareholders and the company and the public at large; to declare void and illegal the appointment of R-2 as CMD and reinstate the petitioner as CMD; direct that the EOGM requisitioned by the petitioner under Section 169 of the Act be ordered to be convened to consider the matter for the removal of the Company's directors namely, Dr. Meena Patil (Arbatt), Shri Raj Kumar Rathi and Dr. Riaz Khan and appointment of three new directors namely Shri Anandrao Gharad, Shri S.K. Jain and Shri Madhukar Mehkare in place of the Directors so removed; direct the ROC, Maharashtra to convene the 10th and 11th Annual General Meetings of the company to transact the ordinary business for the years 2001-2002, 2002-2003, so that the obligations of the company towards the shareholders of the company and the creditors be discharged.; direct that the allotment of shares made by Board of Directors of the company on 10.8.2002 of 70000 equity shares be declared as void and illegal and the directions may be issued by the Hon'ble Bench for allotment of the equity shares against the petitioner and other share application money of Rs. 37,29,501/- lying pending with the company, since long and earlier to this allotment dated 10.8.2002; issue directions under Section 234(1) of the Act, to submit explanation for illegal removal of the petitioner from the office of the Chairman and Managing Director of the company and filing of Form No. 32 with the ROC; that the petitioner being the minority shareholder of the company be granted relief under Section 397 and 398 of the Companies Act, 1956 by way of removing illegally appointed self styled Managing Director, Dr. Meena Patil (Arbat), Respondent No. 2 and prosecuting the Respondent No. 3 Dr. Raj Kumar Rami and Respondent No. 4 Dr. Riaz Khan, who are hand in glove with the respondent No. 2 in mismanagement of the affairs of the company, further the respondents also be removed from the directorship of the company; that the petitioner be granted immunity from all the business transactions and activities of the company done by respondents No. 2 and 4 during the period from 17.9.2001 till date.
2. The undisputed facts of the case are: The respondent No. 1 company, namely M/s Ketki Reearch Institute of Medical Sciences Ltd was incorporated on 3.3.1993. The authorized capital of the company is Rs. 1 crore comprising of 10 lakh equity shares of Rs. l0/- each. The issued, subscribed and paid up capital of the company is Rs. 94,70"000 comprising of 9,47,000 equity shares of Rs. 10/- each fully paid up. On 18.4.95 it was converted into a public limited company. The Registered office of the company is situated at 275, Central Bazar Road, Ramdaspeth, Nagpur-440 010 in the State of Maharashtra. The petitioners shareholding in the respondent company constitutes approximately 20% of the total paid up share capital. He holds 1,89,100 equity shares of Rs. 10/- each. Three other shareholders namely, Shri Amol Patil, Mr. Dilip Kalmejh and Mr. Satish Gawande holding equity shares amounting to 17,100 (1800, 13,600 and 1700 respectively) have also given their consent to join the petitioner in CP No. 106/03. Thus the shareholding of the petitioners works out to 21.78% of the total paid up share capital of the respondent company. The main object of the company is (i) to acquire, establish and maintain hospital for the reception and treatment of persons suffering from illness or mental defect or for treatment of persons during convalescence, or of persons requiring medical attention or rehabilitation and to provide medical relief to the public in all the branches of Medical Sciences by all available means. (ii) to carry out medical research by engaging in the research and development of all fields of medical sciences and in all therapies of medical treatment, so as to afford medical relief in a better way.
3. Shri Gagan Sanghi, Counsel for the petitioner contended that the petitioner who was the single largest shareholder and a promoter director was holding the post of CMD with the approval of the Board of Directors with effect from 1995. As a part of the planned conspiracy by respondent Nos. 2,3 and 4 by allegedly illegally holding meetings on 3.9.2001 and again on 17.9.2001 i.e. just before the 9th AGM which was scheduled to take place on 29.9.2001 the respondents resolved illegally and amended the provisions of the Company's Articles of Association relating to appointment and reappointment of CMD and reduced the tenure of office from the period of 5 years to 2 years to be occupied by the directors by rotation. In the meeting illegally convened on 17.9.2001 R-2, 3 and 4 of the Board of Directors of the company the respondents removed the petitioner from the office of Chairman-cum- Managing Director of the company without the knowledge to the petitioner of the Board's meetings conducted on 3.9.2001 and on 17.9.2001. The petitioner came to know of the same from a notice dated 29.9.2001 circulated by R-2 under her signatures to be placed on the notice Board of the company for the information of the staff and others. It was vehemently contended that the petitioner had not been served with any notice for the Board Meetings held on 3.9.2001 and 17.9.2001. Further it was contended that the respondents' plea that the petitioner has vacated his office as a director of the company because he failed to attend the meetings of the Board of Directors on 17.9.2001, 9.11.2001, 21.12.2001 and 28.1.2002.is false and his removal is illegal as no such notices were received in these meetings and till date no resolutions of the members/shareholders of the company have been passed pursuant to Section 28 of the Act to oust the petitioner from the office of the director. Responding to the argument of the respondents that the petitioner must prove that he has not received the notices for the Board Meetings dated 17.9.2001,9.11.2001,21.12.2001, the petitioner placed reliance on various judgments wherein it has been held that in case of disqualification under Section 283(1)(g), the onus of proving despatch of notices and its receipt by the director is on the company and not on the director. It was further contended that the petitioner cannot be expected to prove a negative fact i.e. he did not receive the notices as only a positive fact can be proved i.e. the notices were sent by the company and received by the petitioner. Responding to the respondents' arguments that since the trial court in R. Cs. No. 2791/2001 filed by the petitioner has recorded a finding that the notice dated 13.9.2001 for the Board meeting dated 17.9.2001 had been served with the said notice has been found to be false and thus, no reliance can be placed on the statement by the petitioner that he has not received the notices for the Board meetings on 9.11.2001 and 21.12.2001, it was contended that this argument is without any merit and is based on misconception of the law applicable in India.
a. This argument is fallacious as it is based on the maxim "falsus in uno, falsus in omnibus" (false in one thing, false in everything), which is inapplicable in India. It has repeatedly been held by the Hon'ble Supreme Court that it is neither a sound rule of law neither a rule of practice. Ugar Ahir v. State of Bihar .
b. This rule is not applicable to civil proceedings also. In civil matters, a court is required to record finding on each issue framed by it. A party is permitted to raise inconsistent pleas as also contradictory pleas in the alternative. If this maxim was applicable, then if the trial court records a finding on one issue against a party, then the court would have to record findings against the said party on all issues as his contention/plea on one issue has been found to be false/unsupported by evidence. This certainly is not the way the courts record findings.
c. This argument has been raised to cover up the failure of the respondents to place on record the notices for the 3 Board meetings, the resolutions passed thereat and any proof of service of the said notices on the petitioner.
d. The respondents would like this Hon'ble Board to "assume" that the notices were duly sent and received but shy away from placing material on record to warrant/substantiate this assumption." Further, it was contended that at page 28, the trial court has made the following observation - "it is the fact that in copy of minute book of meeting dated 3.9.2001 and that of 17.9.2001, there are certain variations about subject matter kept for both meetings and certain additions made in meeting dated 17.9.2001 about subject, specifically about operation/handling of accounts of company by two directors". It was argued that this shows that the respondents had manipulated the notices and resolutions passed at the meetings held on 3.9.2001 and 17.9.2001 by making changes in the agenda. Perhaps the significance of the "variations" could not be appreciated. Looking to the conduct of the respondents, it was pointed out that it is quite possible that the respondents changed/added to the agenda for the meeting as they saw that the petitioner was not present in the said meetings. It is to hide the aforesaid facts that despite repeatedly being asked to produce the notices and minutes for the 3 board meeting, the respondents have suppressed the said documents from the CLB. It was argued that reliance on the interim order dated 22.10.2001 by the respondents is completely misplaced and they have failed to prove that the three board meetings which the petitioner failed to attend were validly held. The trial court's order dated 22.10.2001 is erroneous and cannot be the foundation of any disability against the petitioner. It is a basic principle of law that an interim order merges in the final order and ceases to operate/survive after a final order and cease to operate/survive after a final order is passed by the court. It is also a basic principle of law that an interim order is passed in aid of the final order and not vice versa. (Reliance was placed on (2004) 11 SCC 168 - para 27; (2005) 8 SCC 423 - para 9; (2003) 8 SCC 648 - para 26). The fact that the order dated 22.10.2001 is an "interim order/interlocutory order" as it was passed on an application under Order 39 Rule 1,2 CPC is undeniable. After the suit filed by the petitioner (R.C.s.No.2791/2001) was dismissed by the trial court for want of jurisdiction, the interim /interlocutory order dated 22.10.2001 stood merged in the final order passed by the trial court. The interim order dated 22.10.2001 does not have any existence independent of the final order. It was argued that this principle has been applied by the Hon'ble Supreme Court in Sangram Singh Gaekwad's case in para 145, where the Hon'ble Supreme Court has observed that observation made on temporary injunction applications do not constitute a binding decision as no finality is attached thereto. Thus, it was contended that all the findings/observations made by the trial court in the interim order dated 22.10.2001 have merged in the final order passed by the trial court which dismissed the suit on the ground of lack of jurisdiction and therefore, there is now no interim order dated 22.10.2001 in existence which operates against the petitioner and can be relied upon by the respondents to say that there would be a conflict of decisions between the trial court and the CLB. It was contended that it is an undisputed position that the suit was dismissed for want of jurisdiction by the trial court. In view of this, any finding/observation made in the interim order dated 22.10.2001 does not operate as res judicata against the petitioner and is not binding against the petitioner. In the case of Sheodan Singh v. Daryao Kunwar in para 13, the Hon'ble Supreme Court has held that - "in order that a matter may be said to have been heard and finally decided, the decision in the former suit must have been on the merits. Where, for example, the former suit was dismissed by the trial Court for want of jurisdiction, or for default of plaintiffs appearance, or on the ground of non-joinder of parties or misjoinder of parties or multifariousness or on the ground that the suit was badly framed, or on the ground of a technical mistake, or for failure on the part of the plaintiff to produce probate or letters of administration or succession certificate when the same is required by law to entitle the plaintiff to a decree, or for failure to furnish security for costs, or on the ground of improper valuation or for failure to pay additional Court fee on a plaint which was undervalued or for want of cause of action or on the ground that it is premature and the dismissal is confirmed in appeal (if any) the decision not being on the merits would not be res judicata in a subsequent suit. Further reliance was placed on the case of Amresh Tiwari v. Lalita Prasad Dubey , wherein the Hon'ble Supreme Court has held that "interim order, even if confirmed by the higher court, would not become final and binding and would not be a bar to passing of a contrary order at the stage of final hearing." Therefore, it was argued, the dismissal of the appeal filed by the petitioner against the order dated 22.10.2001 would not lend any support to the interim order dated 22.10.2001 and make it binding on the petitioner.
4. Shri Sanghi further argued that it is an admitted position that in the suit (R.C.S.No.2971/2001), the issue of validly of the Board meetings on 9.11.2001 and 21.12.2001 did not arise and there are no findings relating thereto by the trial court as the suit was filed in October 2001. The legality and validity of the three Board meetings held on 17.9.2001, 9.11.2001 and 21.12.2001 forms the subject matter of the present proceedings and can be determined conclusively only by the CLB in the present proceedings. Further it was pointed out that in the final order, the trial court has dismissed the suit filed on the ground that it has no jurisdiction to entertain the suit in view of Section 10 of the Companies Act. The decision is not based on Section 10GB, as was argued by the respondents. The finding of lack of jurisdiction by the civil court to entertain disputes relating to removal/appointment of directors in a company by the trial court which holds that "Moreover, the right to appoint and/or remove the directors of a company being a creature of the Companies Act which itself provides a machinery for the enforcement the said right, the civil court's "jurisdiction is impliedly barred". (1998) 2 Com. LJ 117 - para 09. Even if an appeal would have been filed against the final order, the same would have been dismissed in view of the above judgment of the Bombay High Court. It was pointed out that the petitioner did not prefer an appeal against the final order because it was thought prudent to file the present proceedings in which the acts of mismanagement and oppression committed by the respondents could be brought before and adjudicated by a competent court. The present petition is a comprehensive petition which challenges not only the removal of the petitioner as the CMD and as director in the meetings dated 3.9.2001 and 17.9.2001 but also puts in issue the conduct of the respondents who have been managing the affairs of the company in an oppressive, unfair and unjust manner to the prejudice of the shareholders. Thus, it was contended that the argument that the petitioner is bound by the findings recorded in the order dated 22.10.2001 but is trying to have a "second shot" in the present proceedings and bring about a conflict of decisions, is patently fallacious and contrary to the basic principles of law.
5. Furthermore, referring to the trial Court's interim order dated 22.10.2001 it was pointed out that in his plaint, the petitioner has stated that he had not been served with the notice for the Board meetings dated 3.9.2001 and 17.9.2001. (Reply to CA No. 274/05 - Page 131 para 7, page 133 para 10 refers) At page 26 of Counter Affidavit, in para 8 of the interim order, the trial court has recorded a finding that the stand taken by the respondents that notice dated 31.8.2001 was served on the petitioner by hand appears to be more probable as the petitioner has not stated how he came in possession of the notice dated 31.8.2001 (which has been referred to as Document 1 by the trial court). This finding, it was pointed out, is clearly unsustainable in law as the trial court has in the same para recorded-
a It is an admitted fact that there is no mention on document No. 1 about receipt or acknowledgement of the notice by the plaintiff (petitioner):
b. It is the fact that there is no other evidence produced by defendant, i.e. affidavit of the person who tendered said notice on plaintiff (petitioner).
Thus, it was argued, the finding recorded by the trial court that the petitioner was served with the notice dated 31.8.2001 for the Board Meeting dated 3.9.2001 was, obviously, unsupported by any evidence and is recorded by a flawed process of reasoning. Moreover, the said finding have been recorded at an interim stage without evidence been led by the parties cannot prevent the CLB from reaching a different conclusion after perusal of all the documents placed on record by the parties which were not before the trial court. The trial court's order at page 26 also shows that the respondents had placed some document to show that the petitioner and Shri JF Salve were served notice dated 13.9.2001 for the Board meeting dated 17.9.2001 through City Courier Service, which was supported by "Document 5". It was argued that there can be no justifiable reason why respondents have not placed the said "document 5" on record before the CLB when they placed it before the trial court. The said document was required to be placed on record before the CLB as it is the case of petitioner that he has not been served with the notice dated 13.9.2001 and the notices for 2 other meetings (9.11.2001 and 21.12.2001), which he purportedly failed to attend. Having failed to do so, adverse inference against the respondents has to be drawn in as much as they have deliberately suppressed the said document from the CLB. It was argued that the onus to prove that the notices for all the three meetings were served on the petitioner is on the respondents since it is their case that the petitioner failed to attend 3 consecutive Board Meetings despite service 6f notice.
6. Regarding illegal allotment of 70,000 equity shares, Counsel for the petitioner contended that it is argued by the respondents that a special resolution Under Section 81(1A) of the Act was passed in EOGM on 4.5.2002 and therefore, the directors could have allotted the shares to whomsoever they wanted and were not bound to offer them Under Section 81(1). The EOGM allegedly held on 4.5.2002 was attended by 7 shareholders only out of 369 shareholders. Respondent No. 2 and 3 were amongst the 7present and had collected 22 proxies. (page 5 of the affidavit dated 12.4.2006 filed by respondent No. 3 refer). The notice for the EOGM and the explanatory statement does not anywhere say about the requirement of capital for paying SICOM or that the company intended OTS with SICOM and wanted to have the funds in its possession (page 4, 4A refer). The notice for EOGM is allegedly sent UPC as seen from page 35 to 55 of the affidavit dt 12.4.2006. It was pointed out that this has to be considered in the light of the conduct of the respondents in not issuing notices for meetings at all but showing them on paper (page 53,54,66 of rejoinder by petitioner and page 67 of CA No. 274/2005 (para 5)- where this complaint has been made in the 13th AGM. It was contended that this shows that the UPCs have been procured by the respondents without actually issuing the notices. Further, it was pointed out that in contradiction to sending the notice by UPC when notice of the 13th AGM is published in newspaper, the attendance in the AGM is far more as can be seen from the attendance register (page 44-55 of rejoinder to CA No. 274/2005). This shows that there was in fact no EOGM at all and the respondents have shown a paper meeting using the U.P.Cs. Further it was argued that it is trite law that the directors of a company act in a fiduciary capacity. It is their discretion as to whether the new shares would be allotted as per Section 81(1) to the existing shareholders or under Section 81 (l A). This discretion to proceed under Section 81(1) or 81(1A) should be bonafide and not malafide. If the exercise of this discretion is tainted with malafide and governed by the desire to take over control of the company or increase one's own shareholding, the said exercise would be bad in law and be set side by a court. It was pointed out that as can be seen from item 3 in the notice dated 4.3.2002 calling the EOGM (page 4 of affidavit dated 12.4.2006, the Board proposed to pass a special resolution under Section 81(1A) refer). Article 8 of the Articles of Association of the company (page 36 of the petition refer), inter alia, provides that the "The director may likewise dispose of any new shares which (by reason of the ratio the new shares bear the shares held by reasons entitled to an offer of new shares) cannot in the opinion of the directors be conveniently offered under these Articles". It was argued that there is no explanation by the respondents as to why the Board chose to propose passing of a resolution Under Section 81(1A) and not Under Section 81(1). There is no reason given by the respondents as to why they were of the opinion that the new shares cannot be allotted to the existing shareholders.
7. Shri Sanghi, Counsel for the petitioner further contended that the respondents have argued that since the petitioner refused to give his personal guarantee to the UWB, they did not offer any shares to the petitioner is false as the petitioner had not refused to extend his personal guarantee for the OTS as can be seen from the letter dated 9.2.02. It is again an undisputed position that: (a) prior to the impugned allotment, the petitioner was the single largest shareholder in he Respondent No. 1 company, (see page 86 of the petition.); (b) as can be seen from the balance sheet as on 31.3.2003, the petitioner had advanced an amount of Rs. 5,06,000/- as unsecured loan to the respondent No. 1 company - the highest amongst the respondents (page 40 of rejoinder); (c) the petitioner had already given his residential flat as collateral security for the loan taken from UCO Bank by the company; (d) the petitioner had also given his personal guarantee for procuring a DG set required by the company. (See page 66 para 2(c) of the counter affidavit refers);(e) as has been shown by the ledger account, an amount of approx Rs. 11 lakhs has not till date been paid by respondent No. 1 to the petitioner towards his professional fee; (f) an amount of Rs. 5 lakhs which had been given by the petitioner to company towards share application money is still with the company and neither shares therefore have been allotted nor has the money been refunded to the petitioner. In these circumstances, it was contended that the argument of the respondents that the petitioner should show "heart" is nothing but a naivety as the petitioner alone has invested more money in the company than respondent No. 2, 3 and 4 combined.
8. Shri Sanghi, Counsel for the petitioner contended that the respondent's arguments that the Board allotted shares to themselves as there was an urgency to repay SICOM and they could not wait to make an offer to the shareholders is clearly mischievous as the Board had already decided to retain control over the new 70,000 shares which is clear form the fact that they proposed the special resolution Under Section 81(1A) on 4.5.2002 itself when they proposed to increase the share capital on 4.5.2002 in the EOGM. Had there not been any malice in the action of the respondents, they would offer the new shares Under Section 81(1) and only if adequate response would not have been received by them, they would have been justified in allotting the shares to themselves. The counsel for the petitioner challenged the allotment and the allotment was made without any notice to the shareholders that the said shares were available for allotment, and the allotment was made by the Board to the exclusion of the petitioner as they wanted to disturb the shareholding pattern of the company and is thus, malafide. The petitioner contended that action of the respondents in allotting the shares to themselves was actuated by malice. It was further argued by the petitioner's counsel that it is an established position of law that the statutory returns of the company are prima facie evidence of the facts stated therein and are binding on the company. In the annual return dated 30.9.2002 Respondent No. 2 has been shown as a director only, not the Chairman and Managing Director. (Reliance was placed on (1992) 3 Comp. L.J. 89 - Para 10. It was argued that the respondents' contention before the CLB that Respondent No. 2 was appointed as CMD of the company on 17.9.2001 is untenable. Petitioner averred that -
1) As per the respondents, the petitioner would be eligible for reappointment as CMD in 2007 - (Counter Affidavit page 24 para v refers).
2) The petitioner was holding the post of CMD with the approval of the Board of Directors post 17.4.2000 -(Rejoinder page 5 para 7 refers).
3) The petitioner did not receive the notices for the board meetings on 17.9.2001, 9.11.2001, 21.12.2001, and 28.1.2002 -(Rejoinder page 13 para 24 refers).
4) Notice to shareholders for passing of special resolution Under Section 81(1A) was not given by the respondents - (Rejoinder page 13 para 24 refers).
5) Respondent No. 2 has siphoned off funds from Respondent No. 1 company by repaying her personal loan from company account - (C.A. No. 274/2005 page 7 para 13 refers)
6) Respondents deliberately omitted to give notice to the petitioner of the Board meeting on 24.9.2005 by Regd. Post and despite interim order dated 9.12.2003 passed by this Hon'ble Board - (C.A.No. 274/2005 page 18 para 32 refers).
9. Responding to the respondents' argument that the entire issue of 13th AGM is pending before the criminal court and so, no relief can be granted to the petitioner in the C.A.No.274/2005, the counsel for the petitioner contended that -
a. No court - be it the Hon'ble Bombay High Court or the learned criminal court where the trial is pending - has passed any order of staying the matter by virtue of which the present proceedings cannot continue and be finally concluded.
b. The trial court would only determine whether or not the offences with which the petitioner has been charged with have been proved beyond reasonable doubt. This adjudication would be subject to appeal and would take considerable time before it reaches finality. The trial court will not adjudicate on the validity of the 13th AGM held on 29.9.2005 or 30.9.2005, which forms the subject matter of the proceedings before the CLB.
c. The insistence of the respondents that this Hon'ble Board wait for the trial court's decision in the matter is aimed at permitting them to continue in management of the company when they have lost the confidence of the majority of the shareholders. The aim is simply to prolong this litigation as long as possible to keep the petitioner out from management of the company.
d. Charge sheet has been filed in the trial court.
It was pointed out by the counsel for the petitioner that the minutes and attendance register were maintained faithfully by the petitioner for the 13th AGM, on 29.9.2005 on simple papers as Respondent No. 2 and 3 had taken away the statutory records of the company with them when they abandoned the meeting. Had the appropriate registers been made available to the petitioner, he would have maintained the same in proper form, as required by the Companies Act. So, the respondents cannot blame the petitioner and take shelter of the provisions of the Act by saying that the minutes filed by the petitioner before this Hon'ble Board for the 13th AGM held on 29.9.2005 are not in the proper form s prescribed in the Act. Certainly, the respondents cannot be permitted to take benefit of their own misdeeds.
10. Shri U.K. Chaudhary, Counsel for the respondents stated that the petitioner has come before the CLB with unclean hands and with ill motives and is not entitled to any relief from the CLB. Further, it was contended that as per the alleged facts and instances of oppression and mismanagement envisaged in the petition, no case of oppression and mismanagement has been made out and the present petition is liable to be dismissed. Regarding the allegedly illegal removal/vacation of office by the petitioner as a managing director of the respondent No. 1 company it was pointed out that it is an admitted position that the petitioner was the Chairman and Managing Director (CMD) of the Company since the incorporation of the company in 1995. However, the petitioner ceased to be the CMD of the Respondent No. 1 company on 17.4.2000. Under the provisions of Section 317 of the Companies Act which after the commencement of the Act, no company shall appoint or employ any individual as its managing director for a term exceeding five years. Further Section 317 also provides that any individual holding the post of MD shall -be deemed to have vacated the office on the expiry of five years. Therefore, on 17.4.2000 the petitioner deemed to have vacated the office and could not have continued after 17.4.2000 as a managing director of the company. As regards the petitioner's reliance upon Article 35 of the Articles of Association of the company, it was pointed out that Article 35 of the company does provide that the petitioner shall be the CMD of the petitioner company, which is an admitted position, however, the provisions of Section 317 of the Act makes the contents of the Article 35 completely redundant. The provision of Article 35 becomes totally redundant in view of Section 9 of the Act. Therefore, the contention of the petitioner regarding his removal as a Managing Director of the company is totally baseless and is liable to be ignored. Further as regards the contention of the petitioner that the petitioner was removed from the post of the managing director only on 17.9.2001 illegally it was contended that the same is devoid of any merits. The Board of Directors of the company decided to make the post of the Managing Director rotational for a period of two years and only took a note on 17.9.2001 and subsequently appointed Dr. Mrs. Meena Patil (Arbat) as a Managing Director of the company for a period of two years. Therefore, the contention of removal of the petitioner as a Managing Director is baseless and devoid of any merits is liable to be dismissed.
11. Further, the counsel for the respondents replying to the petitioner's contention that the petitioner is not subjected to any of the disqualification specified in Section 283 of the Act and continues to be the director of the company in view of Article 35 of the Articles of Association of the company argued that the contention of the, petitioner in this regard is totally baseless and devoid of any merits. On 28.1.2002 the petitioner deemed to have vacated his office as a director of the company, it was taken note by the Board in view of the provisions of Section 283(1)(g) of the Act. The attention of the CLB was drawn to the averments made at page 28 para XII of the reply to the petition, wherein it was stated that the petitioner deemed to have vacated his office as a director of the company because he failed to attend the meeting of the board of directors on 17.9.2001; 9.11.2001; 21.12.2001 and 28.1.2002. It was argued that since the petitioner has failed to attend more than three consecutive board meetings of the company he is deemed to have vacated his office in view of the provisions of Section 283(1)(g) of the Act. It was argued that the notices of all the Board Meetings were duly sent to the petitioner and the petitioner had full knowledge of the meetings of the board of directors of the company. Therefore, the requirements of Section 286 of the Act was also followed by the company. It was pointed out that the fact regarding the valid service of the notices of the Board Meeting can also be confirmed from the order dated 22.10.2001 passed by the Civil Court, Nagpur in Civil Suit No. 2971/2001 in a Civil Suit filed by the petitioner. The order dated 22.10.2001 clearly mentions that the petitioner was validly served with the notices of the Board Meeting dated 3.9.2001 and 17.9.2001. It was argued that the removal of the petitioner as a director is legal and valid in the eyes of law. Responding to the petitioner's argument that the interim order dated 22.10.2001 has merged with the final order, wherein the civil suit was dismissed for want of jurisdiction, therefore, once the civil suit is dismissed the interim order has no bearing and the same is null and void, it was contended that the said contention of the petitioner is devoid of any merits as the order dated 22.10.2001 was passed on a civil suit filed by the petitioner seeking temporary injunction on the respondents. The interim order was passed after hearing both the parties at length and after perusing the records and submissions of the respondents. Further replying to the petitioner's contention that since the civil suit was dismissed for want of jurisdiction the interim findings of the civil court is liable to be ignored it was argued that the said argument of the petitioner is not legally tenable. It is pertinent to note that the civil suit was dismissed only on the ground of want of jurisdiction. Further, the civil suit has not been dismissed on merit's wherein the interim orders passed are in nullified or cancelled in any way. Further the order dated 22.10.2001 was passed after hearing both the sides in detail. Therefore, the observations made in order dated 22.10.2001 is final and binding on the parties. The subsequent dismissal of the suit confirms the fact, that the order was correctly made and that finding cannot be overruled and the petitioner cannot in law agitate the same issues again. The two cases relied upon by the petitioner, it was pointed out are not at all applicable as the same only provides "Res Judicata - Principle of - it is the decision on an issue, and not mere a finding on an incidental question to reach such decision, which operates as Res Judicata." Therefore, it was argued that the contention of the petitioner as regards the removal as a director concerned is liable to be ignored, as the removal is legal and valid in the eyes of law, in view of the provisions of Section 283(1)(g) of the Act and in view of the various notices served upon the petitioner.
12. Regarding the allegedly illegal allotment of 70,000/- equity shares to the respondents No. 2,3 and 4 on 10.8.2002, the counsel for the respondents argued that the allotments of 70,000 equity shares was valid in the eyes of the law and the company duly followed all the provisions of the Companies Act, 1956 and Articles of Association. The said allotment of 70,000/- shares was made to facilitate the payment of existing liability of SICOM by the company. The increase in the capital resulted in a huge waiver of loan of Rs. 119.18 lacs. Replying to the petitioner's contention that the respondent company had allotted the 70,000/-shares to the respondents and had not offered the same to the existing shareholders. It was pointed out that the respondent No. 1 company has duly passed a resolution as provided in Section 81(1A) of the Act in the general meeting. It was argued that Section 81(1A) is amply clear that if the company passes a Section 81 (1A) resolution in the general meeting than the company is free to allot the shares to any person. Therefore, the company had passed an enabling resolution in a validly convened meeting and, therefore, the allotment of shares in accordance with Section 81(1A) of the Act is valid and cannot be challenged.
13. Shri U.K. Chaudhary, Counsel for the respondents further argued that the petitioner who was at the helm of the affairs of the respondent No. 1 company failed to take care of the liability of the SICOM. The petitioner not only failed to manage the company but also burdened the company with huge debt and the liability of the SICOM was incurred during his tenure as CMD of the company. The respondents after September 2001, by taking active interest in the affairs of the company continued the negotiations with SICOM successfully repaid the liability of the SICOM and the increase in the share capital was a part of such process. Petitioner's argument regarding pending at the time of allotment of share was said to be false money.
14. Pointing towards the conduct of the petitioner, counsel for the respondents stated that various cases of cheque bouncing under Section 138 were filed and the respondent company had to face the said charges in a Court of Law. Due to the improper policies of recruitment from 1998-2000 and mis-handling of staff, the respondent company suffered financial loss to the tune of 7 to 8 lacs. Respondent No. 2 was physically injured in an attack by labour. Mismanagement on the part of the petitioner had resulted into a huge debt of almost 30 lacs in the year 2001 at the time of change of management. In the year 2000 the respondent company had an operational tie up with Appollo Hospital Hyderabad which had materialized by the efforts of Dr. Riaz Khan. However, due to the complete failure on the part of the petitioner, the said tie up was broken in December 2001. It was pointed out that pertinent to note that after the vacation of the petitioner from the office as a director and fate the day to day control of the represents the business and overall condition of the Hospital has improved by leaps and bounds. It is pertinent to note that in addition to the settlement of the SICOM liability, the infrastructure, machineries, ambulances and the survival and financial condition of the Hospital has improved. It was argued vehemently that the petitioner is not entitled to any relief from the CLB as no case of oppression and mismanagement has been made out and the conduct of the petitioner itself disentitles him from any relief from this Hon'ble Board.
15. On consideration of the facts and circumstances of the case as well as the pleadings and the arguments of the counsels for the petitioner and the respondents, I find that the respondents have failed to refute the allegations levelled against them. The respondents' preliminary objection raised that the petitioner has come with unclean hands is also not tenable. 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 also held 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. " There have been allegations and counter allegations in this petition. The petitioner had filed a civil suit against the respondents which was dismissed for want of jurisdiction by the trial Court. Further, the issue of AGM dated 29.9.2005 is already a subject matter of Criminal Writ Petition No. 632/2005 filed by the respondent company which is pending before the Criminal Court for adjudication. In fact, while objecting to the petitioner's CA No. 274/2005 on the grounds of maintainability the respondents have pleaded that the principles of rest-judicata would apply as the said matter is already sub-judice before a Court of Competent Jurisdiction and the present issue regarding the AGM of the respondent No. 1 company, cannot, in any way, be decided by the CLB and they prayed for keeping the matter pending till the disposal of petition No. 632/2005 by the Criminal Court. It was emphasised that the conduct of the petitioner disentitled him from any relief from the CLB on equity jurisdiction. I am in total disagreement with the respondents that the principles of rest-judicata would apply in deciding CP No. 106/2003 and Company Applications made therein. The Apex Court has made it amply clear in para 186 in the case of Sangramsingh P. Gaekwad and Ors. v. Shantadevi P. Gaekwad (Dead) thro' Lrs. And Ors. . The CLB alone has the jurisdiction to entertain petitions and applications under Sections 397 and 398 of the Act, it cannot be the subject matter of adjudication by any other Court. What cannot be done directly cannot be done indirectly. Further, I find no reason to dismiss the petition at the threshold on the basis of unfounded allegation of unclean hands.
16. Considering this case on merits, I find that except meeting the petitioner's removal as CMD in view of the amendment of the Act, the respondents have failed in refuting the allegations regarding removal of the single largest shareholder of the company who was also the original subscriber and promoter of the respondent company by resorting to the provisions of Section 283(1)(g) of the Act; issue of additional shares of 70 lakhs without making an offer to the petitioner by resorting to Section 81(1A) of the Act taking shelter under the plea that it was to clear of the loan to SICOM for which the petitioner had pledged his own residence; non-maintenance of statutory records of the respondent company and non filing of statutory returns of the company on time. As regard the petitioner's contention that the notices for the Board Meetings on 17.9.2001, 9.11.200121.12.2001 and 28.1.2002 referring to his rejoinder at page 13 in para 24, it is settled law that mere production of the certificates of posting issued by the Postal Authorities would not be a conclusive proof of having served the communication upon the addressees. Onus to prove posting of notices of meetings rests with the sender who has to establish posting by sufficient corroborative evidence. The onus to prove that notices were sent is on the respondent company, which onus, the company has not discharged. The respondents contention that the petitioner vacated his office by operation of law provided in Section 283(1)(g) fails in view of non service of proper notice. Any omission to serve a special notice on the director sought to be removed constitutes denial of his/her statutory right of reply. In the absence of such notice to the director, any resolution for his removal would be vitiated by such omission. I do not see any other material substantiating the fulfilment of the requirements of Sections 284 and 190 before removing the petitioner from the post of Director. Moreover, the petitioner is one of the promoter directors of the company who was also CMD from the inception of the company. Further, the respondents' contention that the Civil Court, Nagpur's interim order dated 22.10.2001 in Civil Suit No. 2971/2001 filed by the petitioner mentioning that the petitioner was validly served with the notices of Board Meetings dated 3.9.2001 and 17.9.2001 would operate as rest judicata against the petitioner, has been squarely met by the petitioner's detailed arguments given above which for the reasons of prolixity I refrain from repeating. Once it is held that the judgment in previous suit is without jurisdiction, then the principles of rest judicata would not apply. Further, besides the two meetings mentioned in the interim order there are other meetings as well regarding which the onus of service has also not been discharged. Furthermore, the respondents' plea further gets refuted by the petitioner's correctly held contention that an interim order merges in the final order and ceases to operate/survive after a final order is passed. It is true that an interim order is passed in the light of the final order and not vice versa. In this matter the civil suit was dismissed for want of jurisdiction and, therefore, there is no interim order dated 22.10.2001 in existence which operates against the petitioner. In these circumstances, the resolution passed to remove the petitioner as director is oppressive, warranting appropriate relief.
17. As regards allotment of 70,000 equity shares to the respondent Nos. 2,.3 and 4 on 10.8.2002 to the exclusion of the petitioner and other shareholders whose share application money was pending on that date by the respondents resorting to a resolution under Section 81(1A), without giving proper notices to the then directors and other shareholders, it follows that the respondents who owed a fiduciary duty to the shareholders of the company failed in their duties, as the allotment was done with the obvious ulterior motive of increasing their shareholding, the fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. In Needle Industries' case the Supreme Court referred to some old English decision with approval. Punt v. Symons was quoted at SCC p.394, para 105 in which it was held:
Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used.
Piercy v. S. Mills and Co. Ltd. applied the same principle while holding: (All ERp.316 E-E).
The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.
The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was done with the sole object of gaining control of company by becoming majority shareholders was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioner without giving proper notices and without following proper procedure. Regarding service of notices, the respondents relied on certain certificates of posting issued by the postal authorities. I have not felt safe to decide the controversy of service of notice on the basis of the certificates.
18. As already pointed out onus to prove posting of notices of meetings rests with the respondent company, which onus, the company has not discharged. Issue of additional shares with the sole purpose of gaining control over the company is an act of oppression on the part of the respondents. Keeping these circumstances in view, the issued and allotment of 70,000 equity shares on 10.8.2002 to respondent Nos. 2,3 and 4 is hereby declared null and void.
19. As regards petitioner's contention that proper statutory records have not been maintained and the respondents have not followed due procedure for filing the statutory returns of the company with the ROC, the respondents have not produced any record to refute the allegations made. Keeping in view the fact that the respondent company was incorporated to maintain a hospital for the treatment of persons suffering from illnesses as well as to carry out medical research, the conduct of the petitioner and the respondents engaging themselves in filing Civil Suits and Criminal complaints impedes the smooth functioning of the essential service. To overcome the impediments and to make the hospital functional in true sense ROC Mumbai, Maharashtra is hereby required to oversee the next AGM/EOGM of the respondent company which is to be held within six weeks of receipt of this order by the respondent company. The ROC is further required to ensure compliance to the statutory returns by the respondent company.
20. In view of the foregoing, to do substantial justice between the parties, I order as follows:
a. Since I held that the contention of the respondent company that the petitioner has vacated office of director under Section 283(1)(g) of the Act cannot be sustained for the reasons given above, I declare that the petitioner shall continue as a director of the company.
b. The issue and allotment of 70,000 equity shares to respondent Nos. 2,3 and 4 on 10.8.2002 is hereby declared null and void. The issue and allotment is cancelled and status quo ante as on 9.8.2002 is hereby restored. The register of members be rectified accordingly forthwith.
c. To safe guard the interest of the respondent company, I hereby direct the ROC, Mumbai, Maharashtra to oversee the respondent company's next AGM/EOGM to be held by the respondent company within six weeks of the receipt of this order by the respondent company.
21. With the above directions, I dispose of this petition and all company applications made in this petition. All interim orders made are hereby vacated. No order as to cost.