Company Law Board
Brij Mohan Bansal vs Bansal Gems Pvt. Ltd., Shri Manmohan ... on 4 March, 2002
ORDER
A.K. Banerji
1. By means of this petition filed under Section 397 and 398 of the No. Companies Act 1956 (the Act) the petitioner has alleged acts of oppression and mismanagement against the respondents and has sought appropriate reliefs.
2. Briefly stated, the case of the petitioner as set out in the petition is that M/s Bansal Gems Pvt. Ltd. (respondent No. 1) was incorporated on 15.10.1988 with an authorised capital of Rs. 5 lacs and a paid up capital of Rs. 10,000 only. The company was promoted by the petitioner and the respondent No. 2, both brother, who are the permanent directors of the company with equal equity participation with the object of export of jewels and precious stones. Both of the promoters subscribed one equity shares each in the company in the Memorandum of Association and subsequently on allotment, both held 50 equity shares each in the company. The petitioner and the respondent No. 2 were the only shareholders, permanent directors participating in the management of the company, as a quasi partnership. In May 1995 the respondent No. filed a partition suit against the petitioner relating to family properties and the relations between them became strained. Taking advantage of his position as Managing Director and in control of the affairs of the company, the respondent No. 2 manipulated the records of the company by fabricating the minute books of the Board of Directors and General Meetings, and shifted the Registered Office of the respondent company from Chittorgarh to Jaipur without the knowledge and consent of the petitioner who was the only other Director and shareholder of the company. He also allegedly allotted 50 equity shares of Rs. 100 each at par to the respondent No. 3 on 10.9.1992 as evident from the Form No. 2 dated 8.10.92 clandestinely without the consent and approval of the petitioner and also appointed the said respondent No. 3 as an additional director. Again on 06.6.1994, 50 equity shares were allotted at par to respondent No. 4 who was the wife of the respondent No. 2, and also appointed her as an Additional Director of the Company as evident from the Form No. 32 dated 14.6.1994. The petitioner never received any notices of the Board Meetings allegedly held on 28.5.1994 and 6.6.94 and apprehend that the said minutes have been fabricated by the respondents. By alloting the shares as stated above, the respondent No. 2 has reduced the share holding of the petitioner from 50% to 25% thereby he has become a minority shareholder and is also in minority on the board of directors. The respondent No. 2 has indulged in large scale falsification and fabrication of the records of the company and has even forged the signatures of the petitioner on the annual return filed with the Registrar of Companies by the respondent No. 2 on or about 19.11.1992. The petitioner has been excluded from the management of the company despite the fact that he was one of the promoters and permanent director of the company. The respondent No. 2 has established a proprietary concern in the name and style of HNB Exports on or about the month of Jan 1993 and started diverting the customers, business and profits of the said respondent company to the said concern which is operating from the same premises were the registered office of the company is located. This competitive business is detrimental to the interest of the company, the profits of which has been substantially reduced to a minimum and the export business of the company have dried up. The respondent company has also advance loans of about Rs. 14.5 lakhs to the said firm of the respondent No. 2 during the year ending 31.3.1994 and 1995 and the said firm has been shown as a debtor of the respondent company. In view of the misconduct of the respondent No. 2 who has taken over the company in his exclusive management and eroded its resources, the petitioner had no option but to file CP No. 14/1995 before the Rajasthan High Court for winding up of the company under Section 433(f) of the Act. The respondent raised the question of maintainability of the petition on the ground that the remedy lay before this Board under Section 397/398 of the Act, consequently the petitioner withdrew the winding up the petition seeking permission to approach this Board. The respondents are guilty of fraudulent conduct which is wrongful, burdensome and harsh vis-a-vis the petitioner. The facts constituting acts of oppression justify winding up of the company on just and equitable grounds, however, as winding up would unfairly prejudice the petitioner, he has prayed for appropriate orders under Sections 397, 398, 402, 403 No. and 406 of the Act for redressal of the acts of oppression and mismanagement set out above and No. has inter-alia prayed that the Board of Directors be reconstituted with petitioner and the respondent No. 2 only and the two other directors be removed from their office of directorship and the allotment of the 50 equity shares each to respondent No. 3 and 4 be declared as No. illegal null and void and non-est. It has also been prayed that investigation be ordered into the affairs of the respondent company and HNB Exports to ascertain siphoning of funds and acts of mismanagement by respondent No. 2. Apart from the said reliefs, other consequential reliefs have also been claimed.
3. Initiating arguments on behalf of the petitioner, Shri U.P. Mathur, learned counsel for the petitioner submitted that the respondent company was a family company promoted by two brothers (petitioner and respondent No. 2) who were the only shareholders and permanent directors of the company which was in the nature of a quasi partnership,. right from the time of its incorporation. There was equal shareholding and equal representation on the Board and the management of the company was carried on jointly. The registered office of the company was at Chittorgarh where the petitioner resided. The respondent No. 2, with oblique, motive, clandestinely, without the consent of the petitioner and by manipulation of the records shifted the registered office to Jaipur were respondent No. 2 resided and thereafter to exclude the petitioner from the management of the company and to reduce him to a minority, first allotted 50 shares to the respondent No. 3 and subsequently allotted 50 shares to respondent No. 4 who was the wife of the respondent No. 2 and also made them directors of the respondent company. The petitioner therefore was reduced from a 50% shareholder to 25% shareholder and also in minority in the Board. All this was done malafide with the motive to take control of the respondent company. For this purpose the respondent No. 2 fabricated the records and also forged the signature of the petitioner where required and submitted false returns before the Registrar of Companies. In fact no such Board Meetings as alleged had taken place. All minutes copies of which have been filed by the respondent as per the directions of this Bench, are in the same handwriting and appears to have been written at the same time. The records been fabricated to show as if the petitioner was present in the Board Meetings. It is evident from the facts that the conduct of the respondent No. 2 against the petitioner is grossly oppressive and lacking in probity fairness and against the spirit of partnership. Mismanagement is evident from the fact that the respondent company which was running in profits and had good export earnings is now making only nominal profits through local sales and the export orders have either dried up or all been routed through the proprietorship concern of the respondent No. 2. In these circumstances, it has been contended that the prayers made in this petition be allowed to put the affairs complained of to an end.
4. Manmohan Bansal (respondent No. 2) who appeared in person before us has on the other hand submitted that the present petition has been filed as a counter blast to the partition suit filed by him filed as a counter blast to the partition suit filed by him in the year 1995. The petitioner himself has admitted that till the filing of the suit in May 1995, the relations between the parties were cordial. The registered office of the respondent company was shifted to Jaipur in July, 1992 much before the relation between the parties became strained. The requisite forms were filed with the Registrar of Companies on 5th Aug. 1992 and the petitioner was fully aware of the same as he was present in all the meetings. So far as the allotment of shares was concerned 50 shares were allotted to Smt. Lad Kanwar (respondent No. 3) who was none other but the mother of the petitioner on 10.9.92 and 50 shares were allotted to respondent No. 4 Smt. Kamla (wife of the respondent No. 2) on 6.6.1994. In both these meetings, the petitioner was present and the shares were allotted with his consent. As a matter of fact, the petitioner signed the annual return as on 30.9.1992 which return shows the allotment of shares to the respondent No. 3 and her appointment as director. Despite this fact disclosed in the reply of the respondent the winding up petition, the petitioner did not dispute the signing of the annual of the shares in the said petition. It has been contended that Form No. 2 in respect of the allotment of shares to the respondent No. 3 and respondent No. 4 have been duly filed with the ROC on 9.10.1992 and 23.6.1994 respectively and therefore a presumption can be drawn under Sections 194, 195 and 75 of the No. Companies Act that the same were properly done and the petitioner not having challenged the said allotment at the point of time is estopped from challenging the same now. The petitioner himself has filed as annexure 'K' to the present petition the annual return dated 9.10.1992 which bore his signatures and wherein the allotment of shares to respondent No. 3 was mentioned. As regards the contention that the shares alloted to respondents 3 and 4 were alloted at par though the price of the shares would be many times more, the respondent No. 2 has referred to the case of the Needle Industries (AIR 1981 SC 1298) and contended that the directors have power to issue shares at par. Besides this was a family company and the shares were issued to the mother and the sister-in-law of the petitioner that too with his consent in a Board Meeting where the petitioner was present.
5. It was also contended that the respondents 3 and 4 were appointed directors with the consent and knowledge of the petitioner. The appointments were valid and proper and the required form No. 32 were duly filed with the Registrar of Companies and is also supported from the corresponding resolutions in the minute book, copies of which have been filed and are on the record. In this case also presumption under Sections 194, 195 and 75 of the Act can be drawn in favour of the said appointments and the petitioner is estopped from challenging the same. By the said appointments there has been no violation of any of the Articles and Section 257 of the Act was not applicable to private limited companies. Referring to the case of Shri Ram Vilas Press v. K. Meenakshi (1992) 73 Comp. Cases 275 it was contended that unless the Articles so required the company was not bound to inform its members about candidature of a person for directorship at a general meeting and the proposal could begin straightaway at the meeting itself.
6. As regards the reduction of the shareholding of the petitioner it was contended that the company has a right to allot the remaining of the authorised share capital and had rightly allotted 50 shares each to the respondents 3 and 4 and in doing so there was no violation of the provisions of the Articles of Association. Besides the shares were allotted with the consent of the petitioner and the very fact that he did not challenge the allotment earlier and even in the winding up proceedings it goes to show that the present objection is an after thought and motivated. Denying the allegations of the petitioner that his signatures were forged in the annual return filed with the ROC in the year 1992 and certain other documents it was contended that the same was without any basis and the respondents had already filed an application in the present proceedings in the month of July, 1997 to get the signatures examined by a competent handwriting expert.
7. As regards the allegation regarding competitive business carried on by the respondent No. 2 in the name and style of M/s H.N.B. Exports it was contended that the said business was not a competitive business and was started only after a resolution was adopted in the meeting of the Board of Directors on 24.2.1992 in which the petitioner was present. Attention was also drawn to the annexure R-14 of the reply which was a letter of the petitioner dated 10.11.1991 by which the petitioner had given his consent about the starting of a personal business by the respondent No. 2.
8. As regards the allegation regarding mismanagement it was contended that the company did not suffer in any manner by the shifting of the registered office, allotment of shares or appointment of directors or by carrying on the personal business of the respondent No. 2. The company suffered due to the non cooperation of the petitioner as well as by the other brother namely Shri C.M. Bansal to whom the goods were being exported earlier and who had stopped giving orders. In fact the petitioner ceased to attend the meeting of the Board of directors after 13.12.1994 despite notices sent to him thereby incurring the disqualification to hold office of director under Section 283(1)(g) of the Act. All the notices of the meeting were sent under UPC as provided under Section 53 of the Act and three letters were sent by Registered. Post all of which has been denied by the petitioner with ulterior motive.
9. We have heard the parties and have perused the pleadings. In view of the close relationship between the parties we had suggested that the dispute may be settled amicably by them, but despite sufficient time being granted on request, the parties failed to arrive at a settlement consequently we heard the case on merits. Admittedly this company was promoted by the two brothers and the only business of the company was to export jewels and precious stones to a business house at Germany which was being run by another brother namely C.M. Bansal. Initially only the two brothers were the promoter directors and subsequently when the impugned shares were allotted that was to the respondent No. 3 who was the mother of the contesting parties and the respondent No. 4 who was the wife of the respondent No. 2. Thus it is clear that inspite of the corporate status, the company was being managed as a family company in the garb of a quasi partnership, as also evident from the copies of the correspondence filed by the respondent No. 2 alongwith the reply to this petition. In a family company of this nature wherein there had been equal shareholding between the two groups right from the incorporation any change in the shareholding parity, it has been repeatedly held, without mutual agreement is definitely an act of oppression meriting winding up of the company on just and equitable considerations. In fact as noticed in the present case the crux of the contention of the learned counsel for the petitioner is to this effect. Similarly, where there is equal participation in the management by two directors and where appointment of additional directors from one group the equality in participation in the management has been disturbed, it has been held that the same amounts to oppression. Here, however, the contention of the respondents is that the allotments were made to the mother and sister-in-law of the petitioners with his consent and knowledge and he was a party to the same. In pursuance of our order dated 8.2.99 the respondents have produced the original and have filed the photocopy of the minute book of the Directors Meetings, the attendance register as well as the minute book of the General Meetings alongwith the photocopy of the notices of the meetings including the agendas which goes to show that the meeting of the Board of Directors as well as the General Meetings had taken place from time to time and till the year 1994 the petitioner had participated in those meetings. Though the minutes appeared to have been written by the same person as the handwriting appeared to be similar yet in a small family company comprising only of two shareholders initially and thereafter four shareholders, established with an authorised capital of Rs. 5 lakhs only, no exception can be taken for the minutes being written by one and the same person. From the photocopy of the postal receipts which have been filed it is evident that the notices were duly sent to the shareholders including the petitioner. The petitioner has only made a bald statement that the notices and the postal certificates have been fabricated, however, in the absence of any evidence from the side of the petitioner in rebuttal we are unable to accept the case of the petitioner with regards to the same.
10. There is another aspect of the matter. In paragraph 6.3 of the petition it has been stated that the relation between the two brothers, viz. petitioner and respondent No. 2 became strained when the respondent No. 2 filed a suit No. 11 of 1995 in the Civil Court at Chittorgarh against the petitioner relating to family property and thereafter the mutual confidence had been breached by the said respondent who had acted in a systematic and planned manner with the active support of the respondent No. 3 and 4 to oust the petitioner from the management of the affairs of the company. Similarly in paragraph 10 of the rejoinder it has been stated thus;
"Subsequently due to strained relations developed in 1995 between the petitioner and respondent No. 2 the respondent No. 2 planned to oust the petitioner, his younger brother from the respondent company, allotted shares to his wife and the mother by fabricating the records and also inducted them in the Board of Directors".
Obviously therefore, the relations between the parties were not bad till atleast May 1995. If this was the situation it was inconceivable that the respondent No. 2 would transfer the Registered Office from Chittorgarh to Jaipur in the year 1992 and would be holding meetings of the Board of Directors and the General Meetings without the petitioner having any knowledge of the same. The respondent has filed copy of the form No. 23 and 18 for change of the registered office with effect from 9.7.92 and the corresponding Board resolutions in respect of the said change. Similarly with regards to the allotment of shares made in favour of respondents 3 and 4, the copies of the relevant form No. 2 filed with the ROC on 9.10.92 and 23.6.94 respectively are on the record. These contemporaneous documents support the case of the respondent that there was no fabrication or manipulation in respect of the records so far as the change of the Registered. Office or the allotment of shares and the appointment of additional directors were concerned. The annual return as on 30.9.92 copy of which is on record as Annexure K to the petition shows that the same was signed by the petitioner wherein the 50 shares allotted to the respondent No. 3 has been disclosed. Copies of Form No. 32 in respect of the appointment of additional directors namely, respondent 3 and 4 are also on the record. In the absence of any cogent evidence from the side of the petitioner we are unable to accept the case of the petitioner that these documents have been fabricated or manipulated to oust the petitioner from the management.
11. That apart in proceedings under Section 397/398 the conduct of the parties is a relevant consideration. The petitioner's case is that he along with the respondent No. 2 signed the last annual return upto 25.9.91 and balance sheet as at 31.3.92 but thereafter he was not issued notices of Board Meetings and had no knowledge regarding the allotment of additional shares till 1992 he was attending the Board Meetings but thereafter he was not issued notices and had no knowledge regarding the allotment of additional shares to the respondents 3 and 4 and about their being made additional directors. Being 50% shareholder and having equal representation in the board if his claim is that he had not attended any Board Meetings after 31.3.1992 for want of notice there is nothing on record to show that he had at any time raised the issue with the respondent directors. Being a person involved in business he should be aware of the statutory provisions relating to holding of Board Meetings and General Body Meetings. Apparently the petitioner did not consider it necessary to find out what was happening in the company and why the meetings were not being held. It is unbelievable that the petitioner will keep silent for over three years and not try to find out why the meetings were not being held. Therefore, there does appear force in the submission made by the respondent that the petitioner was aware of what was happening in the company and he was a party to the allotment of shares.
12. As regards the allegation of the petitioner that the respondent No. 2 is running a competitive business as HNB Exports, we find that alongwith the reply the respondents have annexed as annexure R- 14 a letter dated 10-11-91 by the petitioner to the respondent No. 2 where he has given certain proposals for increasing the remuneration of the respondent No. 2 and one of the said proposal was of opening a personal firm by respondent No. 2 and the third brother namely C.M. Bansal could purchase part of his imports through such firm so as to give the respondent No. 2 tax free income and further the company could help the firm in case required. Alongwith documents Annexure R-12 filed collectively the respondent has annexed a copy of the minutes of the Board Meeting dated 24.2.1992 attended by the petitioner and the respondent No. 2 wherein one of the resolutions passed is as follows:
"Resolved that Director M.M. Bansal may start his own personal business and may carry out from this premises only, company may provide time to time help required by him."
In the rejoinder filed to the reply the petitioner has not denied having written the letter dated 10.11.1991 or specifically denied the above noted resolution being passed in the above noted Board Meeting. In view of the same we are not inclined to accept the contention of the petitioner that either this business of the proprietary concern of the respondent No. 2 was competitive to the main business or that the same was prejudicial to the interest of the company. As noted above, the proposal was mooted by the petitioner and accepted by the Board in a meeting in which the petitioner was present and was a party to the resolution passed.
13. Having come to the conclusion that the issue of additional shares as well as the appointment of two additional directors in the facts of the present case could not be taken to be acts of oppression, as the same was as per the resolution of the Board to which the petitioner was a party, the issue for consideration is whether the petitioner is entitled to any relief as we are exercising as equitable jurisdiction in a proceeding under Section 397/398 of the Act.
14. It is very clear from the facts of the present case that the relations between the two shareholders who are the promoters and the permanent directors of the company are very strained. As a matter of fact in the winding up petition (CP 14 of 1995) filed by the petitioner before the Rajasthan High Court in paragraph 9 of the said petition the petitioner had pleaded that the relation between the two directors were no longer cordial and allegations of fraud and fraudulently prepared documents have been made. It was stated that when the circumstances have become so acute that the petitioner was raising doubts about the bonafidies of another director, all these taken together would lead to one conclusion that it is just and equitable that the company should be wound up. In the present petition also, the petitioner has alleged that the facts constituting acts of oppression justify winding up of the company on just and equitable grounds, however, as winding up would unfairly prejudice the petitioner, her has prayed for appropriate orders under Section 397/398, 402 of the Act for redressal of the acts of oppression and mismanagement. The remedy under Section 397 is alternative to winding up, which means that the interest of the company is paramount in moulding the relief. Normally, in a family company like this where both the brothers were promoters and permanent directors holding equal shares, once mutual trust and confidence between them is lost, one of them going out of the company is the only way, which would protect the interest of the company. Having held that the allotment of shares made to respondents 3 and 4 were valid the petitioner has become a minority shareholder. Therefore equity demands that the petitioner may sell his shares on the payment of reasonable and appropriate value of his shares and go out of the company
15. Accordingly we order as follows:
a) The respondents or the company will purchase the shares held by the petitioner at a value to be determine by an independent valuer. In case the company decides to purchase the shares then consequent reduction in the share capital will be effected;
b) The date of valuation of shares will be 31.3.97 which is the proximate date to the date of the petition, since the petition was filed in Oct 1996.
c) The allotment of impugned additional shares will remain as it is.
d) The additional directors will continue.
e) Till such time the shares are purchased the petitioner will be entitled to receive (though having ceased to be a director) notices for all the Board Meetings together with agenda as well as the General Meeting atleast 15 days prior to the date fixed, by Registered Post. He shall also be entitled to receive copies of the resolutions passed in the Board Meetings for information.
f) The parties will appear before us on 23.4.2002 at 4 p.m. for suggesting the name of an independent valuer.
This petition is disposed of accordingly with no order as to cost.