Company Law Board
Pokhran Investments Private Limited ... vs Dadha Estates Private Limited, ... on 20 January, 2005
Equivalent citations: [2006]132COMPCAS324(CLB), (2005)5COMPLJ141(CLB), [2005]60SCL561(CLB)
ORDER
K.K. Balu, Member
1. This petition is filed under Sections 397 and 398 of the Companies Act, 1956 ('the Act') alleging that the affairs of M/s Dadha Estates Private Limited ('the Company') are being conducted in a manner oppressive to the petitioners as well as prejudicial to the interests of the Company and claiming the following reliefs:-
a) to restrain the Company and/or any person claiming through the Company, its agents, officers, servants, nominees from dealing with and/or encumbering the property belonging to the Company;
b) to supercede the Board of Directors of the Company and appoint an administrator to take charge of the affairs of the Company and its property; and
c) to appoint an expert to investigate the accounts as well as the dealings of the second respondent in relation to the Company and surcharge the second respondent for manipulations and losses caused to the Company.
2. The main grievances of the petitioners are -
(i) non-holding of any Board Meeting or General Meeting of the Company and non-issue of any notice for such meetings to the petitioners as per the statutory requirements of the Act;
(ii) exclusion of the petitioners from day to day affairs of the Company;
(iii) manipulation of the accounts of the Company by creating fictitious credit entries to the advantage of the respondent group and debit entries against the petitioner group; and
(iv) entering into clandestine agreements with the third parties selling the Company's property incurring enormous losses.
3. Shri C. Harikrishnan, learned Senior Counsel appearing for the petitioners, while initiating his arguments submitted that the Company incorporated in the year 1979 with the main objects to purchase and or sell lands or construct buildings and sell or lease or rent them, is a closely held family company of the second petitioner and his brother, the second respondent, with members of the second respondent's family holding 1800 equity shares, the first petitioner-company exclusively belonging to the second petitioner and his wife holding 1800 equity shares, Milapchand Dadha & Sons (HUF) constituted by the second petitioner and the second respondent, being the Kartha holding 16,300 shares and Shri Mahipal Dadha, yet another brother of the second petitioner holding 100 equity shares of the Company. Under the Articles of Association of the Company the second petitioner and the second respondent are to hold the office of director for their lifetime. In the civil suit in CS. No. 436/2003 filed by the second petitioner before the High Court of Madras for partition and separate possession of 8150 equity shares in the Company, the High Court awarded a preliminary decree, recognising the second petitioner's rights as a shareholder, who is enforcing his rights both as a director and shareholder of the Company. As the second petitioner left for Bangalore in the year 1989 on account of his other business commitments, the Company's affairs have been looked after by the second respondent. Though the second petitioner trusted the second respondent, the latter misusing his position both as the Managing Director of the Company and kartha of the HUF in breach of the confidence reposed on him started-acting detrimental to the interest of the second petitioner causing serious prejudices and adopted innovative methods of manipulation of the accounts of the Company, debiting interest on fictitious loans, personal and extravagant expenses in the Company by way of various perks and privileges of directors and funding such expenditure by resorting to artificial borrowings and investments on the property from his own family members as loans in favour of the Company when it did not carry on any business and fictitious lendings to the first petitioner with the sole intention of claiming the whole property of the Company as a creditor in priority over other shareholders including the petitioners who are holding nearly 50 per cent of the shares, upon completion of the project in lieu of the amounts owed by the Company. The petitioners have produced a consolidated statement of balance sheets of the Company for the years between 1993 and 2003 to show that the Company had no business and the capital remained without any change, but had incurred a huge sum of Rs. 27.82 lakhs towards salaries; administrative expenses of Rs. 74.27 lakhs; interest liability of 2.13 crores, thereby saddling the Company with the fictitious liabilities. While the respondent group did not extend any financial assistance prior to year 1994, they have reportedly become the largest creditor of the Company claiming over Rs. 61 lakhs in the year 1994 and thereafter in 2003, Rs. 2.68 crores out of the Company's total liability of Rs. 2.73 crores. The Company had received rental in respect of the immovable properties and commission to the tune of Rs. 33.26 lakhs and Rs. 35.79 lakhs respectively, which clearly indicate that the Company was not getting any income by carrying on any business activity. The Company had received interest amount of Rs. 69.83 lakhs, out of which a major share of Rs. 36 lakhs has been credited from the year 2001 to 2003. The report of the auditor appointed by this Bench reveals that the Company was not carrying on any business activity and that there are only interest transfer entries in the books of account of the Company. The Company's claim of receivables and liabilities as reflected in the balance sheets are mere book adjustment entries and not supported by any consideration with actual flow of funds. The present financial position as a result of such artificial borrowings, as well as expenditure and financial charges over a period of time is entirely engineered by the second respondent. These borrowings are not either for acquiring the property being the subject matter of the present company petition or for promoting any property at Mint Street as claimed by the second respondent. The subject property was acquired as early as in the year 1979, but the borrowings were said to be incurred long after acquisition of the said property. The amounts incurred for developing the Mint Street property were already realised by collecting substantial advances and rents from the tenants for the past more than 15 years. The first petitioner does not owe any money much less Rs. 80 lakhs to the Company, which are only adjustment entries. There was no need for the first petitioner to borrow any funds from the Company. These amounts which are reflected in the balance sheet of the Company has been signed by the respondents 2 & 3. The second respondent never made any demand 'from the first petitioner for settlement of the alleged outstanding liability till institution of the present company petition. The second respondent failed to convene the Board or General Meetings from time to time and never issued notices to the second petitioner or his wife, being director of the Company for such meetings, thereby excluding them from day to day management of the Company. The second petitioner did not raise any protest against the second respondent, being his eldest brother. There is total lack of transparency in the affairs of the Company carried on by the second respondent. The Company owning the only residential property at Lloyds Road, Chennai measuring 10.5 grounds does not carry on any business. The second respondent treating the property of the Company as his own made secret profits by unilaterally entering into an agreement without knowledge of the second petitioner in the year 1994 with Ready Money Shops & Homes Limited (Readymoney), to develop the property and construct apartments. By virtue of the agreement, the Company would convey 49.40% of the undivided share in the land to Readymoney and in turn would get 18,000 sq. feet of built up area from Readymoney, without any financial obligation on the part of the Company. The second respondent admittedly did not send any notice to the second petitioner for the Board meeting, wherein the Board of Directors allegedly passed the resolutions for sale of the property of the Company. The resolutions so passed are not valid as held in Micromeritics Engineers Private Limited v. S. Munusamy - Vol. 122 (2004) CC 150. The Board resolutions were neither circulated among the directors of the Company as required under the provisions of the Act. The second respondent did not also maintain the minutes books of the meetings of the Board of Directors as required under law and no reliance could be placed on the minutes of the Board meeting for the purpose of Section 193 of the Act. Furthermore, Readymoney failed in the year 1997-98 to honour its commitments causing huge losses to the Company, which remain unrecovered from Readymoney. In the meanwhile, the second respondent entered into an agreement clandestinely with the fifth respondent for sale of 6 flats with built up area of 12661 sq. ft., being the Company's portion of property for Rs. 1,96,24,550/- at the rate of Rs. 1550 per sq. ft. without knowledge of the petitioner and authority of the Board of Directors, when the very same flats are being sold by the fifth respondent at the rate of Rs. 2300 per sq. ft., thereby the Company is sustaining a loss of more than Rs. 750 per sq. ft. amounting to Rs. 94.95 lakhs, which must be made good by the respondent group. Furthermore, the Company has to incur a sum of Rs. 29 lakhs out of the sale proceeds for completing the construction work. The Company would be left with two completed flats measuring 5437 sq. ft. The second respondent apart from misusing his power as the Managing Director of the Company for his personal gains, indulged in gross manipulation with ulterior motive and in breach of trust and against his fiduciary duty towards the Company and other shareholders, thereby gaining control over the assets of the Company to the detriment of the interest of the petitioners which is a gross act of misappropriation as held by the Supreme Court in Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan - 2004 (4) CTC 619. The second respondent cannot plead acquiescence or bar by way of limitation in the event of breach of his fiduciary duties. The petitioner did not approach much earlier the CLB in view of his close relationship with the second respondent, being the kartha of the HUF. If the petitioners establish their grievances, the question of delay in approaching the CLB cannot be raised by the respondents as held in B. Ramachandra Adityan v. Educational Trustee Co. Pvt. Ltd. - (2003) 113 CC 334. In these circumstances, the second respondent must either make good the losses suffered by the Company on account of the proposed sale transaction with the fifth respondent or in the alternative the sale agreement entered into with the fifth respondent must be set aside. Otherwise the CLB may take the position of the Company as of 1994 and direct the second respondent to purchase the entire shares held by the petitioners (8150 shares + 1800 shares) pursuant to the preliminary decree passed by the High Court to meet the ends of justice.
4. Shri P.S. Raman, learned Senior Counsel appearing for the respondents 1-4, pointed out that the second petitioner not being a shareholder cannot maintain the company petition in individual capacity. By arraying the second petitioner as a party, the issues relating to the HUF are sought to be agitated. The first petitioner does not own one tenth of the paid-up capital but being more than one-tenth of the number of share holders can maintain the company petition. The company petition is an abuse of process of law and liable to be dismissed on the grounds of suppression and mis-representation. The second petitioner suppressed the civil suit already filed by him before the High Court of Madras for partition of the HUF seeking for an order of interim injunction against the second respondent from dealing with the property belonging to the Company, which was declined by the High Court, leading to withdrawal of the injunction application, after obtaining an order of ex-parte injunction in the present proceedings against the respondents. The petitioners have approached this Bench with unclean hands and do not deserve any equitable relief sought by them. The Company entered into a joint venture agreement in October, 1994 with Readymoney for development of the Company's property, which was the residence and office of the family of the petitioner group and the respondent group. While the entire ground floor of the property was in exclusive possession of the second petitioner and his family, the second respondent group was in occupation of the first floor of the property. When the development agreement was entered into between the second respondent and Readymoney both the second petitioner and the second respondent handed over vacant possession of the property to Readymoney for the purpose of demolishing the building and developing and constructing the property. By virtue of the joint venture agreement, the Company was to get 18,000 sq. ft. built up area in 18 months and Readymoney 50 per cent of the landed property of the Company. The second petitioner is fully aware of the development of the property by Readymoney. Thereafter, when Readymoney got into financial problems in early 1997, the Company in November, 1997 cancelled the joint venture agreement and power of attorney executed in favour of Readymoney and filed a civil suit in C.S. No. 226/1998 before the High Court of Madras and obtained an order of injunction restraining Readymoney from interfering with the Company's possession and enjoyment of the property so as to complete the project. In the meanwhile, Readymoney had sold 11 flats out of their share of 12 flats in favour of the third parties, out of whom three buyers filed civil suits in 1999 and 2000 against the Company for recovery of the monies invested by them in the project and obtained an order of attachment in respect of the property. Thereafter, the buyers excepting two of them who approached the High Court, Readymoney and the Company entered into a Memorandum of Settlement on 22.10.2002 for completion of the building. A Scrutiny Committee comprising of representatives from all groups was appointed to collect the requisite money to ensure speedy completion of the building. All parties agreed to , bring in monies pro rata and in the event of funds being insufficient to complete the building. The lone flat which remained unsold by Readymoney was utilised to supplement the funds for completion of the construction work. The Company contested the attachment proceedings initiated by the buyers preferring an appeal before Division Bench of the High Court of Madras and ultimately the attachments were raised subject to certain conditions and the Company was further directed to implement the MOS dated 22.10.2002 for expeditious completion of the building. When the office of Sub-registrar refused to entertain, on the complaints of the Commissioner of Police in early 1999, any sale document of the property on account of involvement of Readymoney, the Company was constrained to file a writ petition before the High Court, challenging the Sub-Registrar's action, pursuant to which the Sub-Registrar was directed by the High Court to entertain the sale documents in respect of the property ignoring the complaints of the Commissioner of Police. The respondents 2&3 have struggled for 5 years between 1998 and 2003 in fighting the litigations to save the property and took the initiatives for completing the development and construction work of the property, without any assistance whatsoever from the second petitioner. The second petitioner left Chennai in the year 1997 when Readymoney problems cropped up and thereafter never participated in the affairs of the Company, but started evincing interest, the moment when all the legal hurdles faced by the Company have been successfully resolved by sending legal notice on 17.04.2003 to the second respondent and other Directors and making claim over the subject property. Furthermore, the second petitioner acted in a manner prejudicial to the interests of the Company by causing legal notice dated 08.06.2003 addressed to all the buyers warning them not to deal with the second respondent and his family members in respect of the property, which delayed the resumption of the construction work by safe methods. The second petitioner is guilty of laches, negligence and wilfully absented from the business of the Company. The company petition filed in November, 2003 cannot challenge the transactions which have taken place prior to November, 2000 which are hit by Article 137 of the Limitation Act. The applicability of the law of limitation of 3 years even to petitions under Sections 397 & 398 are upheld by the various High Courts. The second respondent with a view to complete the project entered into an agreement on 15.10.2003 with the fifth respondent for sale of six flats with an extent of 12661 sq. ft. forming part of the Company's share of the property for a total consideration of 1,96,24,550 leaving behind the balance of two flats in the name of the Company, one of which has been offered as security in the pending suits before the Madras High Court. The Company sold the flats at the rate of Rs. 1550/- per sq ft, as against Rs. 1398/- per sq ft sold by the Scrutiny Committee the lone unsold flat of Readymoney. The Company is expected to spend Rs. 6,00,000/- towards its shares for completion of the whole building, in which case the net realization of the Company from sale of 6 flats would be of Rs. 491 lakhs. Thereafter, the Company would be left with 5500 sq ft worth about 110 lakhs, thereby the total realization would amount to Rs. 301 lakhs, towards share of the Company. The fifth respondent, the Company and the various buyers of the apartments have appointed M/s Dual Structural and Industries Limited to complete the construction activities, in terms of the MOS dated 22.10.2002 filed before the High Court of Madras, which are being pursued in the interests of the buyers. The challenges posed by the petitioners would scare away the fifth respondent from investing any further money and the Company would not be in a position to complete the project in terms of the MOS dated 22.10.2002 honouring the undertaking given by the Company before the High Court in OSA No. 477 and 478/2002. The decision to sell 6 flats to the fifth respondent is a commercial decision made by the management of the Company. The petitioners, who have deserted the Company during its period of difficulties cannot interfere with the dealings of the Company. The decisions taken by the second respondent may be imprudent but cannot be oppressive and therefore, the company petition cannot lie. The project with incomplete structure held up for over seven years in litigations cannot command the same commercial value as a problem free property. The dealings with Readymoney in the year 1994 and with the fifth respondent in the year 2003, being unrelated persons are for adequate consideration. A flat situated close to the subject property has been sold at the rate of Rs. 1441.39 per sq ft, as borne out by the sale deed bearing document No. 113/2000 registered on 25/1/2000. The Board meetings are being periodically conducted as per the statutory requirements of the Act. The Company is a closely held company with only family members as directors and there are seven shareholders, who are all within the family and therefore formal notices of meetings have never been issued since inception of the Company in 1979. The second respondent being a director ever since incorporation of the Company at no point of time ever complained of non-issue of notices of the Board meeting. When the second petitioner was in-charge of the Company during the period between 1983 and 1993, no written notice of any general or Board meeting was issued by him. However, when notices for the Board Meetings have been issued to the second petitioner and his wife pursuant to the order of this Bench, the second petitioner attended only two of the twenty Board Meetings and his wife has not chosen to attend any of the Board Meetings, disentitling for any of the reliefs claimed by them. The Company did not have any revenues in the last six years driving the respondents 2 & 3 to invest their personal funds for running the day-today affairs of the Company, as borne out by the balance sheet of the Company for the relevant years. The Company was constrained to borrow monies for acquiring the subject property and developing yet another property at Mint Street, which could not have been accomplished with a meagre paid up capital of Rs. 2,00,000/- and without infusement of over Rs. 3.27 crores by way of additional investment made by the second respondent and his family members. The second petitioner after leaving Chennai was attending to his other businesses and incurred heavy losses forcing him to borrow huge sums of money. At present, the petitioner group is collectively indebted to the Company to the tune of over Rs. 90.70 lakhs, apart from several lakhs of rupees to several other family concerns, companies etc. The accounts maintained in the name of the first petitioner is being operated only by the second petitioner as borne out by the Certificate dated 9.11.2004 issued by the Company's Bankers. The report of the Chartered Accountants confirms the investment made by the respondents in the various family Companies and the withdrawal made by the petitioner group. The amounts were lent to the first petitioner-company by account payee cheques backed by proper entries in the books of account and are reflected in the bank statements. These have been observed by the Chartered Accountants, The first petitioner failed to furnish its books of account to the auditor in spite of the directions of this Bench. The second petitioner has been filing the returns and audited accounts since the year 1998 with the Registrar of Companies, but failed to make available the books of account to the auditor. The Company's borrowing by the year 1992 would show at Rs. 47 lakhs, when the second petitioner was admittedly incharge of the Company. The petitioners have come out with this company petition in order to thwart any proceedings which may be initiated by the Company for recovery of the outstanding amount due from them, in respect of which the Company caused a notice under Section 433 for winding up of the first petitioner-company. Moreover, whether the first petitioner owes any money or not to the Company, does not fall within the scope of Sections 397 & 398 of the Act. The petitioners approached the CLB with oblique motives and ulterior objectives to realise 50% of the sale proceeds of the property without however clearing the liabilities and other financial obligations which shall include a sum of over Rs. 3.27 crores invested by the second respondent and his family members as borne out by his legal notice dated 17.04.2003. The prayer of the petitioners to restrain the respondents from dealing with or encumbering the subject property has become infructuous especially when the construction of flats is nearly completed pursuant to vacation of the interim order made by this Bench. The prayer for the appointment of an expert to verify the books of account of the Company is already granted by the appointment of a firm of Chartered Accountants with consent of both the parties, which may appropriately be considered by the Bench. The petitioners cannot re-open the accounts of the Company after 14 long years, more so when the accounts have been approved and returns filed with the Registrar of Companies and the Income Tax Department. The prayer for superceding the Board of Directors of the Company does not arise on account of the conduct of the second petitioner who has been acting adversely to the interest of the Company and for his personal benefit. According to respondents, the report of the Chartered Accountant contain several contradictions and have not answered many of the objections raised by them. For these reasons, the company petition is liable to be dismissed.
5. According to Shri R.L. Narayanan, the learned Counsel, the fifth respondent entered into an agreement on 15.10.2003 with the Company in furtherance of cancellation of an earlier transaction with Readymoney to purchase six flats covering an extent of 12,661 sq. ft for a consideration of Rs. 1,96,24,550/- with the intention of completing the construction and reselling the flats and obtained a power of attorney dated 15.10.2003 duly executed by the Company, upon which invested over Rs. 86 lakhs for the project in the ordinary course of business to make profits. Before entering into the transaction with the Company, the fifth respondent undertook verification of the title to Property and considered the litigation involved in C.S. No. 226 of 1998 and other civil suits on the file of High Court of Madras in relation to the Property and the MOS including copies of the resolutions of the Board of Directors of the Company, caused a search in the office of the Registrar of Companies and obtained a legal opinion from its Counsel, thereby taking every possible step in this behalf. Shri Narayanan, the learned Counsel referring to the Memorandum and Articles of Association of the Company pointed out that the main objects of the Company are to purchase and or sell lands or construct building thereon and further that the second respondent being the life time Managing Director and Kartha of the HUF is found conducting the dealings of the Company; representing the Company in various litigations filed by and against the Company before the High Court and entered into the - MOS dated 22.10.2002, which made the fifth respondent to deal with the second respondent while purchasing the Property. Furthermore, several of the clauses of the MOS show the intention of the parties to hand over the construction to another contractor acceptable to the Company and other parties and execute the construction work. There is an undertaking given by the second respondent before the High Court to complete the construction work. The fifth respondent is a bonafide purchaser of the property in the normal course of business without knowledge of the disputes among the shareholders and the transaction is a commercial transaction for valuable consideration. The present disputes between the shareholders cannot in any way adversely affect the interest of the fifth respondent derived by virtue of the agreement dated 15.10.2003. The agreement as well as the power of attorney empowering the fifth respondent to deal with and sell the Property are valid documents. The interests of third parties are already intervened, who should not be made to suffer on account of the internal disputes the between two brothers. The brochure, plans and specification of flats (pages 113-123 of company petition) produced by the petitioners conclusively show that the transaction between the fifth respondent and the Company was duly completed much prior to filing of the company petition. The price offered for the property, being the incomplete structure involved in a serious of litigations for several years is fair and the guideline value cannot be made applicable to the property in the present condition. The flats in Royapettah, Chennai is valued at Rs. 1850 per sq. ft. as borne out by an article in the frontline magazine, dated 19.12.2003 and the article published in "The Indian Real Estate, 2003-2004". The Scrutiny Committee sold one flat at the rate of Rs. 1398/- per sq. ft around the time when the impugned transaction was concluded. This respondent would complete the unfinished flats, market them and realize the profits and no motives can be alleged against this respondent on account of the fact that certain flats have been sold by this respondent at the rates ranging between Rs. 1588/-, Rs. 1985/- and Rs. 2108/-. There is no merit in the company petition and must be dismissed.
6. I have considered the pleadings and arguments - oral and written - of the learned Senior Counsel. The issue that arises for my consideration is whether the petitioners are entitled for the reliefs claimed in the company petition on account of the grievances alleged therein. It is on record that the Company is a closely held private limited company shares of which are entirely held by the first petitioner-company owned by the second petitioner and his wife, members of the second respondent's family and Milap Chand Dadha & sons (HUF) constituted by the second petitioner and the second respondent and one Shri Mahipal Dadha, yet another brother of the second petitioner. In the civil suit filed by the second petitioner before the High Court of Madras for partition and separate possession of 8150 equity shares out of 16300 issued by the Company in favour of the second respondent as the kartha of the HUF, the High Court was pleased to grant a preliminary decree, as claimed by the second petitioner. The first directors of the Company are the second petitioner and the second respondent, who will continue in the office till their lifetime or until they resign voluntarily. The second respondent is the first Managing Director entitled to hold the office till his life time. The second petitioner had shifted to Bangalore as early as in the year 1989 in order to pursue his other business commitments, as borne out by his communication dated 14.03.2003 (page 83A of company petition), wherein he categorically asserted that ... "however since 1989 I have shifted to Bangalore and till 1993-94 our communications was more open and frequent, unfortunately since 1995-96 and more particularly after 1997, there has been total collapse of communications with regards to our Joint Business and Finances in Madras". According to the second petitioner, there has been complete breakdown of communication, since the year 1997 between him and the second respondent in regard to the affairs of the Company. It shall be borne in mind that the second petitioner is one of the first directors of the Company still continuing in the office of director. Article 21 (a) stipulates that every director shall discharge such duties as are required under the Act or any statutory modification thereof. By virtue of Article 21(b) every director shall have such rights and powers as specified therein. Article 24(b) empowers a director to call for a meeting of the Board of Directors of the company. The grievances of the petitioners on account of non-holding of any Board meeting or general meeting and non-sending of notices for such meetings to the petitioners are reflected for the first time in the legal notice dated 17.04.2003 (page 84 of company petition) sent by the second petitioner and his wife to the directors of the Company, the relevant portion of which reads as under:
"If the company had to carry out any business activities, and as a sequences thereof was required to make any borrowings, it was imperative that the Board of Directors have a meetings and necessary resolutions are passed. No such proper meetings have been called for or held and my clients have for last 7 years not been informed of any such meetings. From this it appears that certain unilateral paper work and decisions have been taken by you all three directors, without any proper and legal procedures being followed for convening Board Meetings as per company law board guidelines."
Though no meetings of the Company were said to be held for the past 7 years, yet the second petitioner and his wife did not choose to exercise their rights for convening any meeting of the directors of the Company. The second petitioner and his wife in the legal notice dated 08.06.2003 (page 108 of company petition) advised the directors that they have called for an extraordinary general meeting of the shareholders of the Company to consider, inter-alia, the management, operations of the bank accounts and review of the past and present course of action in relation to on-going developments of the Company's property. But, there is no material to show whether such a meeting has at all been called for by the second petitioner and his wife. It is free from doubt that the second petitioner and his wife came out with these grievances in writing only in April and June 2003, prior to filing of the company petition on 12.11.2003, even though no meetings of the members or directors of the Company were said to be convened and held for the past several years. The petitioners who ought to have asserted their rights, in my view, failed to exercise and discharge their duties, as required under the relevant Articles of Association of the Company. At this juncture, it is relevant to serve that on the plea made on behalf of the petitioners in CA No. 146/03, this Bench by an order dated 05.01.2004 ordered that the activities and operations of the Company would be carried on till disposal of the company petition by the Managing Director. The Board meetings would be convened and held after due notice, by registered post A/D to all the directors of the Company and further that the Board meetings shall be held every fortnight at the registered office of the Company commencing from 20.01.2004. Pursuant to these directions, twenty Board meetings were reportedly convened after due notice to the second petitioner and his wife. However, it is observed that while the second petitioner attended only two Board meetings, his wife never attended any of the Board meetings. There is no explanation for non-participation by the second petitioner and his wife in the Board meetings convened by the Company from time to time in terms of the order made by this Bench. It is rather dubious whether the second petitioner or his wife really evinced any interest in the affairs of the Company. Against this background, the grievances of the petitioners that the respondents have not been convening any Board or general meeting or no notices are sent for such meetings do not appear to be genuine. The major complaint of the petitioners is that the second respondent entered into a joint development agreement in October, 1994 with Readymoney in respect of the only major property of the Company without his knowledge and any authority of the Board of Directors of the Company. It is on record that the second petitioner and his wife in the legal notice dated 17.04.2003 (page 84 of company petition) issued to the directors of the Company categorically contended as under-
"The Company under the name and style of M/s Dadha Estates (P) Ltd was incorporated under the provisions of The Indian Companies Act in Chennai. Though the companies Memorandum and Articles of Association enables to carry on large numbers of business activities, unfortunately the said company did not carry out much of the activities for the last 10 years. On the other hand the said company had given its property for joint development with M/s Ready money Shops & Homes Limited, Chennai. The construction of the building is under progress."
From the above recitals of the legal notice dated 17.04.2003 it cannot be said that the second petitioner and his wife are unaware of the development of property in association with Readymoney and the progress of the project from time to time. The legal notice dated 08.06.2003 (page 108 of company petition) caused on behalf of the second petitioner and his wife to the directors of the Company and purchasers of the property reveals that the ongoing developments of the property and the connected civil proceedings pending before the High Court of Madras are within their knowledge. At this stage, the resolutions of the Board of Directors of the Company passed on 20.04.1994, though disputed assume relevance, according to which, the Company was authorised to enter into agreement with Readymoney for the purpose of sale of 50 per cent of the undivided share of interest in the land belonging to the Company in order to develop and construct residential flats by Readymoney and further the second respondent and Mrs. Snehalatha Dadha, director have been severally authorised on behalf of the Company to negotiate, deal with and to execute the agreements including a power of attorney favouring the purchaser and further authorised sale of the remaining proportionate undivided share of interest in the property, other than those offered to Readymoney. Though the petitioners are questioning the legal validity of the resolutions said to have been passed at the Board meeting held on 20.04.1994 on the ground that no notice was issued for the said Board meeting to the second petitioner, and in spite of the fact that the second petitioner in his legal notice dated 03.06.2003 cautioned the purchasers of the flats developed by Readymoney that any sale of the flats without approval of the Board of Directors of the Company and confirmation of the High Court of Madras would not be valid and binding thereby disapproving the arrangement entered into with the second respondent, the petitioners have however "no objection for execution of the sale deeds in favour of the 11 persons who are parties to the settlement Deed dated 22.10.2002"..., as borne out by their counter affidavit filed in CA No. 122/2003 agreeing to convey the flats in favour of the purchasers, thereby taking different stand by them. At this juncture, it should be borne in mind that the resolutions of the Board of Directors authorise sale of the undivided share of interest in the property, covered by the agreement entered into with Readymoney as well as the remaining extent of the property. It is not, therefore, justifiable to disown a part of the transaction, while conceding to the remaining part covered by the same resolutions. The Company is a closely held private limited company, with family members as shareholders and directors and in the words of the second respondent no formal notices of meetings have been issued since the formation of the Company. It is not disputed that the second petitioner hardly attended the Board meetings, while his wife never attended any meeting, whenever convened after due notice to both of them under directions of this Bench, as pointed out elsewhere. The impugned resolutions reportedly passed at the meeting of the Board of Directors as early as on 20.04.1994 for sale of the property, without notice in writing to the second petitioner and his wife, in contravention of the provisions of Section 286, cannot be valid as reinforced in Micromeritics Engineers Private Limited v. S. Munusamy cited supra. However, in a proceeding under Section 397, it must be satisfied whether the resolutions passed at the meeting of Board of Directors are in the interest of the Company and its shareholders. Every action in contravention of law may not per se be oppressive for the purpose of Section 397 provided such action is in the interests of the Company and its shareholders as held by the apex court in Needle Industries (India) Limited v. Needle Industries Newey (India) Holding Limited - (1981) 51 C.C. 743. It is pertinent to observe that the second respondent has been representing the Company in various litigations before the High Court as borne out by copies of the proceedings before the High Court in C.S. No. 226 of 1988 (pages 88A-90 of petition); O.S.A. Nos. 477 and 478 of 2002 (pages 104-107) and C.S. No. 436 of 2003 (pages 38-58), produced by the petitioners. The MOS dated 22.10.2002 is among the Company, represented by the second respondent, the purchasers of flats and Readymoney for completion of the construction of the apartments covered by the development agreement between the Company and Readymoney. The MOS imposes obligations on the Company, the purchasers and Readymoney. Accordingly, the purchasers should bring the required money for completion of the flats by engaging any other contractor, acceptable to the Company and the purchasers. In case of any deficit, the Company and the purchasers must contribute the amount required for completion of the project. The project must be completed and possession of the flats must be effected within six months of the date of the MOS. The MOS envisages constitution of a Scrutiny Committee and other modalities for ensuring commencement and completion of the construction activities. With the execution of the MOS, the civil suits instituted by the purchasers must be closed as settled out of court or the purchasers must seek for a decree in terms of the MOS, as they may so desire. It is further observed that the second respondent has given an undertaking before Division Bench of the High Court in OSA Nos. 477 and 478 of 2002 and CMP Nos. 19130 and 19131 of 2002 that the Company would continue the construction of the flats within reasonable retime, which has been taken on record in the said proceedings. Thus, when Readymoney went into financial crisis and the property development came to standstill followed by a series of litigations at the instances of buyers the respondents 2 & 3 as directors of the Company took all the efforts to resolve the various legal hurdles by defending them and initiating litigations by the Company to safeguard the property and interest of the Company over a period of more than six years. At the same time, the second petitioner and his wife failed to discharge their obligations as directors of the Company and abstained from participation in the management of the Company for several years. I, therefore, find some force in the plea that the fifth respondent entered into the agreement on 15.10.2003 in good faith with the second respondent in furtherance of cancellation of the earlier transaction with Readymoney for purchase of six flats with an extent of 12661 sq. ft. forming part of the Company's share of the property for a total consideration of Rs. 1,96,24,550 which works out at the rate of Rs. 1550 per sq.ft. It is reported that the Company has to spend about Rs. 6 lakhs more towards its shares for completion of the whole building, in which case, the net realization would amount to Rs. 191 lakhs. The Company would be left with 5500 sq. ft. of land worth t about Rs. 110 lakhs. The net result would be that the Company would realize a sum of Rs. 301 lakhs out of its share of the property. The serious grievance of the petitioners is that the property is being sold at a meager price, while the guideline value is of Rs. 100 per sq. ft. There have been as many as five court litigations in respect of the property as borne out by para 4 of the reply affidavit of the second petitioner filed in CA No. 121/2004 and the flats remained incomplete for quite; a number of years. In these circumstances, the property, in my view, cannot fetch the .... prevailing market price. It is relevant to observe that the Company under the authority of the Screening Committee, sold the remaining one flat unsold by Readymoney at the rate of Rs. 1398/- sq. ft. around the period when .the fifth, respondent entered into the agreement, for purchase of six flats from the Company. The plea of the respondents that one of the flats which is located close to the subject property has been sold on 25.0L2000 by one C.R. Srinivasan in favour of Mr. S. Chellappan under document No. 113/2000 at the rate of Rs. 1441.39 per sq. ft. has not been repudiated. It cannot, therefore, be concluded that the sale transaction in favour of the fifth respondent, which would result in realization of over Rs. 300 lakhs for the incomplete structure, in spite of several of the litigations is against the interests of the Company and its shareholders and further that the second respondent acted against his fiduciary duty towards the Company and other shareholders. Therefore, the decision in Dale & Carrington Investment (P) Ltd. v. P.K. Prathapan, does not go to the aid of the petitioners. The petitioners, in my view, have not made out any case to exercise powers vested in Section 402 so as to interfere with the sale agreement entered into between the second respondent and the fifth respondent. In regard to the claim of the respondents that the : transactions which took place prior to November, 2000, being barred by limitation, cannot be reopened in the present company petition having been filed in November, 2003, it must be borne in mind that the purported irregularities are such that their effects, if established would amount to continuous acts of oppression and therefore, no period of limitation would apply. In this connection, beneficial reference is invited to A. Brahmaraj v. Sivakumar Spinning Mills (P) Ltd. - (1986) 3 Comp. L.J. 109, wherein it is held that "if the expression 'affairs of the company are being conducted' appearing in both Sections 397 and 398 of the Act shows a kind of a continuing wrong, afresh period of limitation would begin to run at every moment of the time during which the breach or wrong continues as provided under Section 22 of the Limitation Act; and since the existence of the continuous wrong is the sine qua non for the maintainability, no question of limitation also can arise. Article 137 of the Limitation Act cannot, therefore, apply to a petition under Section 397 or 398 of the Companies Act." Having found that the impugned transactions are amenable for action, the claim of the respondents (a) against the petitioner group for over Rs. 90 lakhs and (b) the investments of Rs. 3.27 crores by the second respondent and his family members must be considered with reference to the report of M/s R. Subramaniam & Co., Chartered Accountants, appointed by this Bench with concurrence of both the parties, to verify the books of account, ledgers, bank statements etc. in respect of the entities, i.e., (a) M/s Dadha Estates Pvt. Ltd., (b) M/s Dadha Securilockers Pvt. Ltd., (c) M/s Alle Chemicals Pvt. Ltd., (d) M/s Dadha Brothers Ltd., (e) M/s Pokhran Investments Pvt. Ltd., (f) M/s Milapchand Dadha & Sons to ascertain the various loan transactions (both given and received) among these entities, the second petitioner, the second respondent and their family members and report the nature of the loan transactions and the outstanding amounts, if any, among these parties as on 31.03.2004. The Chartered Accountants after scrutinising the transactions in the books of account of the above entities, wherever made available for the period between 01.04.1996 and 31.03.2004 in correlation to the bank statements observed, inter-alia, as under:
* Almost all the bank transactions of the various entities and family members transacted through the same branch of Indian Bank are by way of transfers from one account to the other constituting inter-se transfers and not supported by actual flow of funds at each stage. The opening and closing balances, after each of the transfers in the bank accounts, save in a few cases remained the same. None of the entities had any active business on a consistent basis, except the impact on account of interest debited and credited and income from property.
* The amount of interest credited and debited on the outstanding balances are not supported by any document. No tax has been deducted at source on the interest said to have charged on account of the outstanding liability in the name of various entities.
* There is no confirmation of balances of any of the accounts for any of the years.
* The source of advance to the first petitioner by the Company has arisen out of the transfers to the credit of the third respondent, whose books of account were not produced before the Auditor for verification.
* A sum of Rs. 4.50 lakhs was received by the Company from the third respondent who got the amount from the HUF. The HUF received a sum of Rs. 4.50 lakhs from Mrs. Madhu Dadha, who in turn received the said amount from the first petitioner-company. The first petitioner-company was said to have received the amount of Rs. 4.50 lakhs from the Company. All these transfers took place for the same amount and on the same day, i.e., Rs. 4.50 lakhs was repeated five times in the same bank as reported at page 23 of the report. There was no real flow of funds, but only cheque transfer entries passed through the respective bank accounts. At the same time, it is further reported that the bank statement of the first petitioner-company reveals that out of the transfer credit of Rs. 22.50 lakhs from the Company (i) Rs. 4.50 lakhs was transferred to M/s. Alle Chemicals (P) Ltd. and (ii) Rs. 18 lakhs was transferred to Mrs. Madhu Dadha.
A careful scrutiny of the bank statement of the Company (page 25 of the report) reveals that the Company received from the third respondent two cheques of Rs. 4.50 lakhs each on 30.12.1996, two cheques of Rs. 4.50 lakhs each on 31.12.1996 and yet another cheque of Rs. 4.50 lakhs on 02.01.1997. All these receipts were in turn paid by the Company to the first petitioner-company on the very same dates. The first petitioner-company paid to (i) M/s Alle Chemicals Private Limited, Rs. 4.50 lakhs by a cheque on 30.12.1996 and (ii) Mrs Madhu Dadha Rs. 4.50 lakhs by way of a cheque on 30.12.1996, two . cheques of Rs. 4.50 lakhs each on 31.12.1996 and another cheque of Rs. 4.50 lakhs on 02.01.1997 aggregating Rs. 18 lakhs, as borne out by the bank statement of the first petitioner-company (pages 28 & 29 of the report). Mrs Madhu Dadha paid the entire sum of Rs. 18 lakhs to the HUF (i.e.) a sum of Rs. 4.50 lakhs by a cheque on 30.12.1996, two cheques of Rs. 4.50 lakhs each on 31.12.1996 and another cheque of Rs. 4.50 lakhs on 02.01.1997, as revealed from her bank statement (pages 26 &27 of the report). It is seen from the Chartered Accountants' report (page 8) that the HUF transferred Rs. 22.50 lakhs on the same date to the credit of the third respondent, as admitted by the respondent group in their objections (para 7(D)) filed to the report of the Chartered Accountants, which in my view, should only be Rs. 18 lakhs, in view of the payment of Rs. 4.50 lakhs to the account of M/s Alle Chemicals Private Limited, by the first petitioner-company. Thus, the entire payment of Rs. 22.50 lakhs emanated from the third respondent, and travelled through the accounts of the Company, the first petitioner-company, Mrs Madhu Dadha and the HUF ultimately reached the account of the third respondent save a sum of Rs. 4.50 lakhs paid by the first petitioner-company to M/s Alle Chemicals Private Limited. I am therefore, prima facie of the view that the first petitioner-company owes to the Company a sum of Rs. 4.50 lakhs on account of these transactions together with interest thereon. With regard to the huge amounts reportedly invested by the respondent group it is relevant to observe that the main objects of the Company are to purchase and or sell lands be construct buildings and sell or lease or rent them. The consolidated balance sheets of the Company for the period between 1992 and 2003 on record reveals income by way of commission and rent during the relevant years. There has been no income from the Company's main business at the relevant point of time. It is beyond doubt that the Company did not carry oil any business after entering into the joint development agreement in October, 1994 with 'Readymoney, by which, the Company would part with 50 per cent of undivided share of interest in the land and would in turn get 18000 sq. ft. built up area from Readymoney, without any financial commitments or obligations for the Company. The plea that the Company was forced to borrow funds to purchase the subject property and to develop Mint Street property has been made for the first time by the respondents in their written submissions. According to the respondents, they infused funds to an extent of Rs. 3.27 crores for these purposes. Nevertheless, the report of the Chartered Accountants discloses a contribution of Rs. 47,35,980 made by the third respondent during the period between 1996-97 and 2003-04. An amount of Rs. 1,53,57,136.10 is reflected towards interest accrued in favour of the third respondent. The liabilities aggregating Rs. 1,27,36,914.56 of the' Company due to Phalodi Investment (P) Ltd. (Rs.81,72,479.72), Snehalatha Dadha (Rs. 12,88,489), Dadha Securilockers Pvt. Ltd, (Rs. 32.53,815.10) and Real .Trust (I) Ltd., (Rs. 22,130.74) were transferred to the third respondent. The Company paid a sum of Rs. 19,14,015 to the third respondent. The net effect of these transactions and of the opening balance of Rs. 37,160.10 stood in the name of the third respondent, as reflected in the ledger extract of the third respondent in the books of the Company would be that the Company owes a total sum of Rs. 3,09,53,175.76 to the third respondent. According to the report of the Chartered Accountants .these transfers are not supported by actual flow of funds. The amount of interest credited and debited on the outstanding balances are not supported by any document No tax has been deducted at source by the Company on the interest amount charged on account of the third respondent. The various liabilities of (the Company transferred to the third respondent are inclusive of the principal amount and interest due by the Company to the respective entities and individuals, details of which are neither pleaded nor substantiated by the respondents. There is no material to show that those amounts were taken by the Company to pursue its business, when the Company in fact was not doing any business. This runs contrary to the plea of the respondents that the Company was compelled to borrow over Rs. 3.27 crores from second respondent and his family members for acquiring the subject property and developing Mint Street property. I am, therefore, prima-facie, of the view that the purported investments by way of transfer of liabilities of the Company in favour of the third respondent could not be for the purpose of acquiring the subject property and for developing Mint Street property. Consequently, the interest liability of Rs. 2.13 crores, which includes an interest amount of Rs. 1,53,57,136 accrued to the third respondent, reflected in the balance sheet for the year ended 31.03.2004 is not wholly justifiable. Similarly, the investments of the other family members set out in the written submissions of the respondents, said to be for the business activities of the Company remain without being conclusively established by them. In these circumstances, the Company is at liberty to discharge its liability in favour of the third respondent to the tune of Rs. 47,35,980, however, after appropriating the payments already made to him, for the reasons recorded supra. However, the remaining purported liabilities inclusive of interest due to the third respondent and his other family members shall not be discharged by the Company unless and until the monies payable to them are duly determined in any manner known to law. The petitioners are aggrieved of the expenses said to be incurred on account of salaries to the tune of Rs. 217.82 lakhs and administrative expenses of Rs. 74.27 lakhs, which would work out at Rs. 2.32 lakhs and Rs. 6.1 lakhs per year. These expenses said to have been incurred over a period of 12 years, in my view, cannot be exhorbitant. Though the Company is not carrying on the business, yet, the fact is that the Company has been in the midst of several litigations in respect of the property for the past several years and therefore, these expenses are expected to be incurred. The respondent group, with a view to maintain adequate transparency in the affairs of the Company shall ensure that notices of the Board meetings and meetings of the members are necessarily sent in favour of the petitioner group by registered post A/D. Ordered accordingly.
With the above directions, the company petition and the connected applications stand disposed of. No order as to costs. In view of the final order made by this Bench, the interim orders already passed are vacated.