Company Law Board
Shri Anant Ram Sarangal And Shri Ajay ... vs Balwant Bros. Pvt. Ltd., Shri Chaman Lal ... on 10 October, 2006
Equivalent citations: (2007)1COMPLJ350(CLB), [2007]75SCL97(CLB)
ORDER
Vimla Yadav, Member
1. In this order I am considering CP No. 65/2005 filed under Sections 397/398 of the Companies Act, 1956 by Shri Anant Ram Sarangal and Shri Ajay Sarangal, Petitioner Nos. 1 and 2 respectively alleging "oppression" and "mismanagement" by the three respondents namely, M/s Balwant Bros. Pvt. Ltd., Shri Chaman Lal Sarangal and Shri Manish Sarangal. It has been alleged by the petitioners that the respondents by increasing and issuing of further shares to R-2 and 3 have reduced petitioners' shareholding of 45.92% to 36.7%; that the petitioner No. 1 who was the MD and the petitioner No. 2 have been illegally removed from the directorship; that the increase in the share capital is illegal and uncalled for; and that the funds of the respondent company have been siphoned off. Hence, this petition.
2. The undisputed facts of the case are: M/s Balwant Bros. Pvt. Ltd (Respondent No. 1 company) was incorporated as a Private Limited Company on 28.12.1979. Before incorporation of respondent No. 1 company the two brothers, namely, Shri Balwant Rai Sarangal and Shri Anant Ram Sarangal (petitioner No. 1) constituted a partnership in 1968 under the name and style of 'Balwant Brothers' for the manufacture of sports goods and set up the factory in Balbro Complex at Jalandhar. Petitioner No. 1 took a leading role to explore the foreign market and visited U.K., Germany and Europe and also represented the firm to display the goods of the firm in those countries. Shri Chamanlal Sarangal, the third youngest brother (Respondent No. 2) joined the firm in 1974-75 as a 20% partner without any capital. Shri Balwant Rai later left the firm which was reconstituted in 1995 with P-1, P-2 and R-2 and R-3. The authorized, issued, subscribed and paid up capital of the company was Rs.l crore divided into 10,000 equity shares of Rs.l000/- each. The company was incorporated as a private limited company on 28.12.1979 with Shri Balwant Rai Sarangal, Shri Anant Ram Sarangal (P-1) and Shri Chaman Lal Sarangal (Respondent No. 2) as promoters/subscribers who subscribed for 5 shares each. Under Article 15 all three were the first directors of the company alongwith their mother, Smt Saraswati Sarangal. Under Article 29, petitioner No. 1 was appointed as Managing Director (MD) with powers specified and under Article 34. Respondent No. 2 was appointed as permanent Chairman of the company till his resignation of his own accord. Shri Balwant Rai - the eldest brother died in 1988. Petitioners group held 4592 shares (45.92%) while respondents held 4546 shares (45.46%) in the company. Respondent No. 1 company is in the nature of quasi-partnership and at all relevant times, decisions were taken unanimously.
3. Shri U.P. Mathur, counsel for the petitioners argued: That the basic trust and confidence was breached by respondents who acted in a planned and systematic manner to oust the petitioners and grab the company. Initially, the respondents started sidelining the petitioners and prevented them from entering the factory premises and registered office of the company. Petitioners filed civil suit No. 423/03 on 21.10.03 against the respondents for seeking injunction restraining the respondents from interfering in the affairs of the company and for taking forcible possession of the assets and properties of the company. The Civil Judge vide order dated 27.1.04 dismissed the application against which appeal filed by the petitioners (as plaintiffs) was also dismissed on 4.4.2005 on the ground, inter-alia, that under the Companies Act, 1956 there are specific provisions of Sections 397/398 and the matter be referred to Company Law Board. Petitioners withdrew the suit and the present petition was filed. Petitioner Nos. 1 and 2 were removed as directors w.e.f 25.2.04 without complying with the mandatory provisions of Section 284 of the Act. Besides it, in a family company like the respondent company, removal of promoter-directors and majority shareholders is an act of oppression. Petitioners came to know about their cessation from the letter dated 10.3.04 addressed by the company to the company's bankers, Punjab National Bank and bank's letter dated 5.6.04 and they submit that their removal is illegal, oppressive and bad in law. Bank was informed about removal of petitioners from directorship under Section 284 in a meeting of directors held on 25.2.04. In fact, no such board meeting was held nor any notice of board meeting was given to petitioners. The stand taken by the company in the reply is that removal was made in EGM held on 25.2.04. There is a serious contradiction in the two stands taken by the company. Form No. 32 was filed by the company with Registrar of Companies on 1.6.04 showing removal of petitioner Nos. 1 as MD on 25.2.04 and removal of petitioner No. 2 as director on the same date and MD must be a director first and then he is appointed as MD. In case he is removed as a director, he also ceases as MD and not vice versa. If he is removed as MD (as stated in ROC's letter), he still continues as a director. For reasons best known to the respondents there is consistent assertions made by the respondents before Registrar of Companies and before CLB. But the respondents have not produced copy of form 32 filed with Registrar of Companies. As per page 49 of reply, minutes of Board meting allegedly held on 5.9.03 have been filed. No notice of any such meeting was sent to the petitioners. Directors and respondents have also not given any evidence to show that notices were sent to the petitioners for the alleged board meeting in terms of Section 286 of the Act. It is noticed that minutes have been signed by Secretary although under Section 193(1A)(a) of the Act, the same should be signed by the Chairman of the meeting. As per the respondents Petitioner No. 1 retired on 28.11.84 as MD after five years without any re-appointment. The said provisions of Section 317 have not been read properly. Being a private company, these provisions do not apply to the respondent company by virtue of Sub-section (4) of Section 317. As regards the EGM allegedly held on 25.2.2004 a false affidavit dated 20.9.05 of Mrs. Mamta, general clerk of the company has been produced to show that she went to the residence of petitioners on 3.2.04 for service of notice but petitioner No. 1 misbehaved and directed her to get out. The affidavit is false, Mr. Mamta and her husband are the employees of the company and recently respondent No. 2 has given his bank guarantee in respect of their residential loan. The Respondents have further alleged that notice of the EGM was sent by registered post on 7.2.04 to petitioners. Minutes of the EGM alongwith attendance of shareholders present have not been filed by the respondents. Petitioners were allegedly removed from directorship during the pendency of the civil suit filed by the petitioners and the fact that petitioners were allegedly removed on 25.2.04 was never brought before the civil court or the appellate court. EGM held on 25.2.04 and their removal as directors is illegal and be set aside. The reasons given by the respondents in their reply for removal of petitioners as directors are false. It has been alleged that the Petitioner No. 1 has not taken any part in the day to day affairs of the company and on the other hand respondent No. 2 and 3 have given full attention and time right from 9 AM to 7 PM; that the Petitioner No. 1 wrote to Punjab National Bank to stop bank operations. The respondents have increased the authroised share capital from Rs.l crore to Rs. 1.25 crores in the alleged EGM convened on 5.1.2005. The increase is bad in law. The Respondents have filed minutes of the EGM at page 118 which has been signed by Secretary but not by the Chairman of the meeting as per requirements of Section 193(lA)(a) of the Act. No notice of the EGM was sent to the petitioners-shareholders and no evidence has been produced regarding service of notice on the petitioners. No evidence has been produced by respondents that the Form 5 under Section 97 of the Act has been filed by the company for increase of capital with Registrar of Companies; Article 3 containing the existing authorized share has not been amended. The respondents have allegedly allotted 1300 shares to respondent No. 2; and 1200 shares to respondent No. 3; totalling 2500 on 5.1.2005. No share has been allotted to any other shareholder including the petitioners who are majority shareholders. Form 2 filed with Registrar of Companies is at page 75 of the petition. The alleged allotment of 2500 shares is bad in law. It is Oppressive and be set aside. This is a serious act of oppression as respondents have increased their shareholding from 4546 shares (45.46%) to 7046 shares (56.37%) and petitioners shareholding has been reduced from 45.92% to 36.7%. This cannot be done in a family company and closely held private company. Shri Mathur, Counsel for the petitioners relied on the judgments in Dale andCarrington Invt. Pvt. Ltd. v. P.K. Prathapan and Ors. and S. Varadarajan's case (2005) 65 CLA 21(CLB). Shri Mathur further argued: While on the first page of Form 2 at page 75 of petition, allotment was allegedly made on 5.1.2005 but on the next page the allotment appears to have been made on 6.1.2005. Further, respondents have acted in haste as the shares were allotted on the same date when EGM was allegedly held on 5.1.05 for increasing the authorized capital. In the notice of EGM allegedly held on 5.1.05 at page 71-73 of the petition there was nothing to suggest that shares will be allotted to respondent Nos. 2 and 3 only on the same day. Till 2002-2003 the company was exclusively-engaged in the sale of goods in the domestic market ever since its incorporation in Dec. 79. All of a sudden and without the consent and knowledge of petitioners, respondents have sold goods during 2003-04 in the export market as per balance sheet for that year at pages 32-38 of petition. The company spent more than Rs. 2 lakhs on foreign travel to UK and Europe by respondent No. 3, his mother (wife of respondent No. 2) and his sister (daughter of respondent No. 2). The amount spent on the ladies is not business expenditure of the company and be recovered from them. Petitioners' foreign tours were approved by the board and were undertaken with the consent and knowledge of respondent No. 2. However, tour undertaken by respondent No. 3 and the family was without he consent of petitioner No. 1 and his group. Her sister is not an employee, as alleged. The company has spent Rs. 22,91,295 for construction of a residential building in Balbro Complex, Jalandhar and the same is exclusively used by respondents. Respondents are availing telephone, petrol and driver for personal use. They are also drawing remuneration but these facilities are not available to the petitioners who are major shareholders and directors. Their salaries have not been credited (in case of petitioner No. 1 after 31-8-01 and in case of petitioner No. 2 after 31.11.03). The respondents have given a shop in a commercial area in Jalandhar to Sarv Mitter, friend of Respondent No. 2 and it has not been restored to the company despite protest made by petitioners. The cost of the shop to the company is Rs. 16,10,250. This property is in the name of the company and it has been given by the respondent No. 2 to his friend. The possession of the shop is still with Sarv Mitter and Rajiv Kumar. No lock has been put up by the petitioner as alleged. Mere photograph of locked premises does not mean that the lock was put by the petitioner. Respondents have set up partnership in the name and style of 'Balbro Exports' recently and have started export of goods dealt with by the respondent company since May, 2005. This firm is operating from the premises of the company and is using the infrastructure and internet/telephone facilities of the company. Respondents are, thus, engaged in competitive business and have diverted the company's entire export and atleast 70% of its domestic business and customers of the company to their own firm. The word 'Balbro' is the registered trade mark of the company and the same trade name is being used by the respondents' firm. The company has been hijacked by the respondents who have acted systematically by illegally removing the petitioners as directors, thereafter increasing their share capital and now diverting the company's business. This is a clear case of "oppression" resorted to by the respondents by playing foul in a planned manner. The respondents have made payments to several parties not connected with the business of the company. Details of these payments made during 3.4.03 to 26.7.03 were given date-wise with names and cheque numbers and the amounts in each case at page 78 of the petition. The respondents have merely denied the allegation and have stated that payments made were genuine. Except making a bald statement of denial, they have not given any explanation or justification for these payments. The petitioners have stated that the deposits made by petitioner Nos.1,2 and Smt. Kiran Sarangal with the company amounted to Rs. 49,63,462. This has been denied by respondents at page 26 of their reply. The said deposits appear in the audited balance sheet as at 31.3.2004 signed by respondent Nos. 1 and 2 as mentioned at page 38 of the petition. Petitioners submit that they have spent their entire life for the family firm and the respondent company and have invested everything in them and they have no other source of income for livelihood. Respondents have not agreed even with the Arbitrators' decision given after hearing both the parties on the ground that it was only a Panchayati decision given without notice to them.
4. Shri P.K. Mittal, counsel for the respondents argued: That the petitioner No. 1 was appointed as Managing Director of the company for a term of five years which stood elapsed on 27.12.1984 after the expiry of a period of five years. Subsequently, therefore, no resolution was passed by the company for reappointing him as Managing Director. The learned civil judge vide order dated. 27.1.2004 had observed that (as reproduced page 102 of Main Reply) -
It is admitted fact that plaintiff No. 2 has been alleging himself to be Managing Director of the company since company was registered with the Registrar of Companies and Certificate of Incorporation dated 28.11.1979 has been issued but plaintiff No. 2 continuously remained as Managing Director. Hence he has violated his terms of five years without caring the rules and regulations of the Companies Act. Plaintiff No. 2 was never re-appointed by the Board of Directors as Managing Director of the company and no resolution was passed in the record of the company since once he became the Managing Director in the year 1979. It is admitted fact that as per Section 317 of Companies Act, managing director not to be appointed more than five years at a time and after the lapse of five years, plaintiff is no more Managing director, as resolutions required to be passed regarding fresh election of the managing director. Necessary intimation not given to Registrar of Companies. As already discussed above since 1979, no fresh resolution has been passed regarding fresh appointment of Managing Director.
The Clause 29 of the Articles of Association (on page No. 25 of the petition paper book) only provides that he will function as Managing Director and shall be paid a remuneration subject to the provisions of the Companies Act, 1956. However, the clause No. 29 does not provide that he shall be permanent Managing Director and whereas Clause No. 34 of the Articles of Association (page 27 of the petition) clearly provide that Mr. Chamman Lal Sarangal (Respondent No. 2) shall be the permanent Chairman of the Company till he resigns - meaning thereby in the Articles of Association, wherever it was intended that the post will be permanent, it was provided so specifically in the Articles of Association. The petitioner No. 1 was only an ordinary Director of the Respondent No. 1 company (and not Managing Director) before his removal. The petitioners never devoted their full time and energy for the conduct, development and growth of the business of the respondent No. 1 company. The Punjab National Bank (Banker of Respondent No. 1 company) vide their letter dated 14.2.2001 (page No. 39 of the Main reply of respondents) has certified that Shri Chamman Lal Sarangal (Respondent No. 2) used to look after the bank account and financial affairs of the respondent No. 1 company. Further, various suppliers of raw materials who used to supply various raw materials to the respondent No. 1 company vide their certificates (on page No. 22,23,24,25,26 and 27 of Sur-rejoinder filed by respondents) have certified that all their business dealings had been with the respondent No. 2 and have further certified that no other Director namely Mr. Anant Rama Sarangal, (petitioner No. 2) did any business dealings on behalf of respondent No. 1 company for more than 10 years. At the same time, Chief Accountant and Incharge of supplies in their respective affidavits on page 28 and on page 34 of the Sur-Rejoinder have confirmed that the petitioner No. 1 and 2 never worked on whole-time basis for respondent No. 1 company and they used to visit the factory for one-two hours once in 10-15 days time. At the same time, Foreman of Respondent No. 1 company, in his affidavit on page 38 of the Sur-Rejoinder, has confirmed that the petitioner No. 1 and 2 never worked on whole-time basis for Respondent No. 1 company and they (petitioner No. 1 and 2) used to visit the factory for one-two hours once in 10-15 days time. This voluminous evidence, makes it manifestly clear that the petitioner No. 1 and 2 had never worked as full-time Director of Respondent No. 1 company. The petitioner was removed because of gross misconduct and action highly prejudicial to the interest of the respondent No. 1 company as would be evident from their letter dated 27.8.2003 (page 51 of the main reply of respondents) to the Punjab National Bank to put a complete stop of the banking operation -thus seriously jeopardizing the banking operations of the respondent No. 1 company which is primarily engaged in the export of goods. Further, the petitioner No. 1 and 2 also wrote to the UTI Bank (page No. 52 of the Main Reply) wherein they had called upon the bank to stop operations of the bank account. Pursuant thereto, both the Punjab National Bank and UTI Bank had stopped the operations of the bank account. Further, the petitioner No. 1 and 2 had put a lock on the main gate of the respondent No. 1 factory for closing the operations of the company (photographs on page 58, 59, 60 of the Main Reply of respondents). By disconnecting the electric connection to the factory - (On page 61 of the main reply) the petitioner No. 1 and 2 severally and seriously beaten the employee of respondent No. 1 company (page 57 of the main reply. The respondents have filed various FIRs; dated 16.5.2005 (page 65 of the main reply; dated 25.7.2005 (page 66 of the main petition); dated 6.10.2005 (page 68 of the main petition); dated 7.10.2005 (page 75 of the main reply). Because of these highly injurious, delirious and mis-adventurous acts committed by the petitioners No. 1 and 2, they had been removed as a Directors of the respondent No. 1 company by the shareholders of respondent No. 1 after passing resolution under Section 284 of the Companies Act, 1956. The Board of Directors of Respondent No. 1 company in their meeting held on 5.9.2003 authorized the respondent No. 2 to take such action against the petitioner No. 1 and 2. (Copy of the minutes on page 77of the Main Reply.);The respondent No. 1 company issued a notice dated 3.2.2004 of the Extra Ordinary General Meeting seeking to remove the petitioner No. 1 and 2 (pages 79 and 80 of the Main Reply). The Notice of the EGM was personally carried by Mrs. Mamta, an employee of respondent No. 1 for service upon the petitioners. However, they declined to receive the same by abusing a women employee (Affidavit of Mrs. Mamta on page No. 87 of the Main reply). Consequently, Registered Notices were sent to the petitioners (postal receipts on page No. 88 of the main reply). That along with the petition, the petitioners have filed affidavits of shareholders to say that they have not attended the meeting of the Respondent No. 1 wherein the petitioners were removed (page No. 65 to 68 of Main Petition). Immediately thereafter, all these persons have filed sworn affidavits dated 23.6.2004 (pages 83 to 86 of the Main Reply) wherein all have in one voice confirmed that the petitioners got the affidavits signed from them without actually informing the contents of the Affidavit. The Affidavits were in English whereas two of the deponents are unable to even write in Hindi. This itself demonstrates that the petitioners had filed forged and fabricated affidavits of Mr. Shankar Das and Mrs. Kamla Devi. Further, the shareholders of respondent No. 1 have sworn affidavits reaffirming that they have full trust, faith and confidence in the leadership of Mr. Chaman Lal Sarangal, Respondent No. 2 (page 32 of the sur-rejoinder filed by the respondents). The petitioners have challenged further issue of shares. Further issue of shares was necessitated in view of the expanding operation of the company. The Punjab National Bank vide its letter dated 6.12.2004 (page 117 of main reply) had put a condition for enhancement of working capital limit. Accordingly, an Extra Ordinary General Meeting was called on 5.1.2005 for increasing the authorized capital of the respondent No. 1 company. The notices were sent to various shareholders of the company who have declined to subscribe to Right Shares being offered by the respondent No. 1 company. Refusal of the shareholders to subscribe rights shares had been indicated on the notice itself and copies of such notices were filed on page 128 to 131 of main reply. The minutes of the EGM held on 5.1.2005 wherein the petitioner No. 1 and 2 had been removed after complying with the provisions of Section 284 of the Companies Act, 1956 (showing the attendance of various shareholders who attended the EGM were filed at page No. 118 of the Main Reply of respondents. In para 6.12 of the main petition, it has been vaguely and ambiguously alleged that the funds have been given to various parties, list of such parties was attached at page 78 and 79 of the main petition. The petitioners have not shown or brought any evidence as to how these payments are not genuine business transactions but were fictitious payments. Without any proof of evidence about the alleged siphoning off of funds, petitioners No. 1 and 2 had made only bald allegations. The petitioner Nos. 1 & 2 had made grievance about the foreign visits of respondent Nos. 2 and 3 in connection with the business of the company as the respondent No. 1 is primarily engaged in the export of sports goods. On one or two occasions, the wife of the respondent No. 2 accompanied him to take care of his medical needs. The respondents had given details (on page 22 of the Main Reply) of foreign visits of petitioners and his wife. In their rejoinder, the petitioner Nos. 1 and 2 have admitted these foreign visits by feebly and frivolously contending that these foreign visits were undertaken by the petitioners and his wife with the approval and consent of the respondents -which is totally false.
5. Shri Mittal further argued: That after the petitioner Nos.l and 2 had written letters to the bank stopping of banking operations, the lead bank of the respondent company refused to extend the banking facility forcing the respondents to pay off the liability to the tune of Rs. 51.73 lakhs by the respondents as is evident from the certificate dated 19.10.2005 issued by the Punjab National Bank (refer page 55 of Main Reply). It is reiterated once again that for paying a sum of Rs. 51.73 lacs, the petitioners did not contribute a single paise and the entire amounts was contributed by the respondents. It has been alleged by the petitioner No. 1 and 2 in para No. 10 of the petition that company owned a residential building worth Rs,22.91 lakhs. The respondent No. 2 and 3 had been devoting their entire time and energy (from 9 am to 9 pm). They are given salary of Rs. 6500/- per month as Director of respondent No. 1 company (salary equivalent to a peon in Government of India) plus residential accommodation of the aforesaid building owned by the respondent No. 1 company. It was submitted that the building is the property of the respondent No. 1 company and respondent Nos. 2 and 3 are only residing in the capacity of Working Directors of respondent No. 1. It has been alleged by the petitioners in para No. 6.10 of the main petition that a shop in the commercial area owned by the respondent No. 1 company has been given by respondent No. 2 to his friends for his personal use. The occupant of the shop lodged a police complaint dated 26.10.2004 saying that the petitioners have illegally put a lock on the aforesaid shop. (copy of FIR on page 119 of main reply.) The petitioners in para No. 38 of rejoinder have falsely and frivolously contended that the aforesaid shop was sold to petitioner No. 1 and respondent No. 2 jointly. It was submitted that the property was agreed to be sold to the petitioner No. 1 and respondent No. 2 with vacant possession. Since the previous owner i.e. Mr. Harbans Lal and Mr. Jeet Kumar could not obtain vacant possession of the premises from tenant and, therefore, no Sale Deed (transferring the ownership of the said shop) was executed in favour of the petitioner No. 1 and the respondent No. 2. Counsel for the respondents relied upon the judgments in the case of Hanuman Prasad Bagri and Ors. v. Bagree Cereals P. Ltd. and Ors. (2001) 41 CLA 258 (SC) and Dr. Dileep Makhija and Ors. v. Arun Mittal and Ors. (2004) 59 CLA 177 (Delhi) to reiterate their stand that the petitioner had not made out any case for winding up of the company and that the directorial complaints cannot be entertained in a petition under Sections 397/398 of the Act, Civil Suit being the remedy.
6. I have considered the pleadings and the documents filed therewith as well as the arguments of the counsels for the petitioners and the respondents. Petitioners' case is that their 45.92% shareholding in the company has been illegally reduced to 36.7% by the respondents by illegal allotment of 2,500 shares to R-2 and R-3 on 5.1.2005 without even making an offer to the majority shareholders of this prvate limited company which is nothing but a glorified partnership; that the respondents have illegally removed P-1 and P-2 from the directorship w.e.f. 25.2.2004 without giving them any notice and without giving any right of representation; that the Petitioner No. 1 who was appointed as MD in terms of Article 29 of the company and who has also been the promoter and first director of the company under Article 15 has been illegally removed invoking Section 317 of the Act which is not even applicable to this private limited company; that the increase of the authorised share capital from Rs. 1 crore to Rs. 1.25 crores w.e.f. 5.1.05 is illegal and uncalled for; that the respondents have violated the provisions of Section 219 of the Act by not allowing the petitioners access to the Balance Sheets, etc; that the respondents have siphoned off the company's funds for lavish expenditure on the respondents' residences belonging to the company and maintained from the company's funds besides their incurring of inadmissible expenditure on foreign tours for their pleasure trips; that the resources, the clients and the goodwill of the company are being diverted to the 'Balbro Exports' of the respondents who are using the Regd. Trade Mark of the sports goods produced by the respondent company. The respondents' case is that the petitioner No. 1 being involved in running the Sarangal Family Trust Schools and political activities on wholetime basis hardly devotes any time to the respondent company and has already ceased to be the MD after the expiry of 5 years from his appointment as MD in 1989 as per provisions of Section 317 of the Act; that the removal of the petitioners from directorship of the company has been done in accordance with the provisions of the Act after attempting to serve the notice through an employee of the company and also through Regd. Post on 7,2.2004; that the increase in the authorised share capital of the respondent company was necessary as per the P.N.B.'s letter and as the petitioners" had refused to bring in further funds of more than Rs. 50 lakhs required as additional securities for the company; that further allotment of shares to R-2 and R-3 were justified as the petitioners were not entitled to the offer of additional shares as they had made all endeavours to bring the respondent company on the verge of closure by adopting all illegal, unfair and foul means to torment, terrorize and intimidate R-2 and 3 and employees of respondent company; that the allegations of mismanagement and siphoning off of funds by the respondents is baseless; that the removal of the petitioners from the directorship cannot be agitated in a petition under Sections 397/398 of the Act, remedy available is the Civil Suit and not a petition under Sections 397/398; that mere removal from directorship is not sufficient to approach the CLB, the petitioners' have to justify winding up of the company, and that no such case has been made out.
7. On consideration of the facts and circumstances of the case, I find that the respondents have failed to refute the allegations levelled against them. In the present case the petitioners' plea is that the respondents had very cleverly proceeded to make a malafide and intentional change in the shareholding. It has been alleged that the respondents started nefarious designs when the petitioner No. 1 and 2 were illegally removed from the directorship and that after the illegal removal of the petitioners on 25.2.2004 the authorised capital of the company was illegally increased to Rs. 1.25 crores on 5.1.2005 and by further allotment of 2500 shares to R-2 and R-3 petitioners' shareholding of 45.92% was oppressively reduced to 36.7% "Without making an offer to them. As regards the respondents' plea that the petitioner No. 1 was appointed as the Managing Director(in view of Clause 29 of the Articles of Association on page No. 25 of the petition) of the company for a term of 5 years which lapsed on 27.12.1984 and that after the expiry of a period of 5 years subsequent to appointment no resolution was passed by the company for reappointing him. The respondents also relied on the Civil Judge's Order dated 27.1.2004 (referred to above) in this regard. In fact, till the respondents allegedly considered removing of petitioner No. 1 as MD in the meeting of the Board of Directors on 5.9.2003 they had acquiesced to the petitioner No. 1's functioning as MD. In the minutes of the meeting allegedly held on 5.9.2003 it was recorded that:
Para 3.--Shri Anantram Sarangal Director was appointed as MD of the company under Section 317 of the Companies Act and his retirement was due on dated 28.11.1984 but he acts forcely as Managing Director without any reappointment by the Board of Directors and informing to the Registrar of Companies. Thus he violated the terms without caring the rules and regulations of the company. Now the present directors as well as shareholders of the company have no trust in him. Now it has been unanimously resolved under the present circumstances and the present Directors of the company have authorised Shri Chaman Lal Sarangal being the Chairman of the company, to call all meetings of the Board of Directors/Shareholders under the rules and act of the company and to manage the whole affairs of the company to save the company from any loss.
From 1984 till 5.9.2003 the respondent had acquiesced to the functioning of petitioner No. 1 as MD of the company. Section 317 of the Act purported to be invoked by the Board of Directors, as rightly pointed out by the counsel for the petitioners, is inapplicable to a private company which is not a subsidiary of a public company. As regards removal of the petitioner No. 1 and 2 from the directorship, it is noticed that the provisions of the Companies Act have not been complied with. Proper notices have not been issued to the petitioners. No reliance can be placed on the affidavit of Mrs. Mamta's and her endeavour to serve a notice on the petitioner at his residence 3.2.2004. Mrs. Mamta and her husband Mr. Mukesh Kumar are company's employees and respondent No. 2 has not denied the allegation that he has given his bank guarantee in respect of their residential loan. As regards service on the petitioners through Regd. Letters, the petitioners in their rejoinder (Annexure R-7) have enclosed the status report of enquiries made from the post office which reveal the following position:
i. The alleged registered letter No. 6441 stated to be sent by respondents to petitioner No. 1 on 7.2.2004 at 13.45.23 hours was in fact posted to Jagdev Singh C/o 56 APO on 7.2.2004 at 14.04 hours.
ii. The alleged Regd. Letter No. 6442 stated to be sent by respondents to petitioner No. 2 on 7.2.2004 at 13.45.23 hours was in fact to Sr. Supdt. Post Master (service letter) on 9.2.2004 at 10.08 hours.
iii. The alleged Regd. Letter No. 6443 stated to be sent by respondents to Mr. Rashmi Sarangal on 7.2.2004 at 13.46.23 hours was in fact posted to Mahadev Vishwakarma, Sultanpur on 9.2.2004 at 10.14 hours.
Regarding service of notices, it is settled law that the onus to prove service rests on the sender. This onus has not been discharged. The petitioners came to know about their cessation as the directors of the company from the company's letter to the Punjab National Bank dated 10.3.2004 and the banker's letter dated 5.6.2004 to the petitioners. Furthermore, there is a contradiction in the stand taken by the company regarding the removal/cessation of the directorship of the petitioners. The stand taken by the company in their reply affidavit is that removal was made in the EGM held on 25.2.2004 whereas the Punjab National Bank was informed about the removal of the petitioners from directorship under Section 284 in a meeting of Directors held on 25.2.2004. Furthermore, Form No. 32 filed by the respondents with the ROC on 1.6.2004 showed removal of petitioner No. 1 as MD on 25.2.2004 and removal of petitioner No. 2 as director on the same date. MD of a company must be a director first. In case he is removed as a director he also ceases to be an MD and not vice versa. If he is removed as MD, as ROC was informed, he still continues as a director. Form No. 32 filed with the ROC has not been produced before this Board. Further it is noticed that the minutes have been signed by the Secretary in contravention of Section 193 (lA)(a) of the Act the same must be signed by the Chairman of the meeting.
8. As regards respondents' reliance on the decision of the Supreme Court in Bagree's case Hanuman Prasad Bagree Cereals P. Ltd (2001) 2 Comp LJ 392 (SC) to submit that directorial complaints cannot be agitated by way of petition under Sections 397/398 of the Companies Act and that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds, and that such winding up would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, after observing that the petitioners had not established any act of "oppression" or "mismanagement" in the affairs of the company further observed (para 3 at page 394 of Comp LJ):
Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, 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. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up petition on just and equitable grounds, no relief could be granted to the petitioners.
It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit, and this would not justify winding up on just and equitable grounds. As a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by this Board in Sections 397/398 proceedings. In any view of the matter, in the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of majority into minority. Further, when the promoter having high stake in the company complaints of his exclusion from the management, petitioner No. 1 was the promoter and first director of the company, I feel that equity demands that their complaint should be inquired into in the present proceedings. However, in the present case, the claims of the petitioners are of their claim of quasi-partnership and by denying the petitioners a representation on the Board, they are being oppressed by the majority shareholders. In case of dissolution of a partnership, the just and equitable grounds are wider than the just and equitable grounds applicable in the case of winding up of a company. Similar objection was examined by this Board in Anupar Chemicals case (Dipik G. Mehta v. Shree Anupar Chemicals P. Ltd. (1999) 2 Comp LJ 539 CLB), as follows (para 30 at pages 555 and 556 of Comp. LJ) - as under;
The learned Counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on just and equitable grounds. He also relied on the judgment of Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on just and equitable grounds. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding on just and equitable grounds, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition first, one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Section 397/398, proceedings are alternative to a winding up proceedings, it is not that only those which are considered to be just and equitable in a winding up proceedings to be the grounds in a Section 397/398 petition. In the present case, the petitioners have established oppression as would be clear from the ensuing paragraphs and since the principles of partnership are applied in this case, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership and, therefore, the company could be wound up on just and equitable grounds. In the present case winding up of the company would not be in the interest of the company and the shareholders. However, proceedings under Sections 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members.
9. It is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. On considering the present case on merits, I find that all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed.
10. As regards increase in the share capital of the company, and further allotments, the respondents have not been able to prove the necessity of such increase and following of proper procedure for allotment. The facts of this case do not warrant such increase. Nothing was placed on record to show the need of the company for further investment and hence need for allotment of additional shares. In view of the doctrine of "proper purpose", it follows that in the matter of issue of shares, Directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. 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. In the present case 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 done with the sole object of gaining control of company by becoming majority shareholder 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 petitioners without giving proper notices and without following proper procedure.
11. The petitioners who were holding 45.92% shares (as against the respondents who held 45.46% shares) were not even allowed access to the accounts books of the company and even the provisions of Section 219 of the Act were violated by not allowing the petitioners access to the balance sheet, etc. The respondents have not been able to meet the allegations of siphoning off funds on meeting the personal expenses on foreign tours and companies expenditure of Rs. 22,91,295 on their residential buildings and other personal expenses. The respondents have not been able to meet the allegation that the shop costing Rs. 16,10,250 has been made available to and is still in a possession with Sarv Mitter and Rajiv Kumar friends of R-2. The respondents have not denied that goods have been exported during 2003-2004 in the export market without the consent and knowledge of the petitioners. "The respondents have also maintained silence regarding the other concern namely, 'Balbro Exports ' for which as per the petitioners the company's resources, clients and goodwill have been diverted and 'Balbro Exports' has been using the Regd. Trade Mark of the sports goods produced by the respondent company.
12. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of "oppression" and "mismanagement" in the affair of the company and, therefore, the petition deserves to be allowed. But relief to be granted depends on the facts of a particular case. Though the facts of the present case are so manifestly against the respondents that two opinions are not possible on the aspect of relief and the relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations. But considering the special circumstances of this case, there have been allegations and counter allegations, there are numerous FIRs against each other, there are contradictory affidavits by the employees of the company for and against the petitioners and the respondents, restoring the status quo ante is not the right solution to do substantial justice in this case. Considering the special circumstances of this case, where the petitioners and respondents cannot go along together in conducting the business of the respondent company in a peaceful and cordial manner, I am of the firm view that there should be a parting of ways. Since both the groups hold more or less equal percentage of shares and have also been in management, it would be inequitable to direct either of the groups to go out of the company on valuation. Since both the groups know the worth of the company, I consider it appropriate to direct that both the groups should bid for the shares and the group which bids the higher price for the shares, should purchase the shares of the other group at that price. Accordingly, I direct the parties to be present before the CLB on 13.11.2006 at 10.30 a.m. to bid for the shares.
13. With the above directions, I dispose of this petition, keeping seisin over the matter till the finalization of the bidding.