Company Law Board
Naresh Trehan vs Hymatic Agro Equipments Private Ltd. ... on 12 April, 1999
ORDER
S. Balasubramanian, Chairman
1. The petitioner hereinabove holding about 25 per cent, shares in Hymatic Agro Equipment Private Limited (the company) filed this instant petition under Section 397/398 of the Companies Act, 1956, in July, 1998, alleging acts of oppression and mismanagement in the affairs of the company. The admitted facts in this case are that the company is a family managed company having four shareholders at the time of incorporation of the company, viz., S.P. Trehan, the father and three sons, viz., Naresh Trehan, the petitioner, Rajesh Trehan and Rajan Trehan, respondents Nos. 3 and 4, respectively. This company took over the business of one Hymatic Industry, a partnership firm consisting of the petitioner, the father and respondent No. 3 as partners. When this company was incorporated in 1985, the father was appointed as the managing director and the petitioner and respondents Nos. 3 and 4 were appointed as the whole time directors and the business of the company was being carried on smoothly till the year 1992, when the father expired. Respondent No. 2, namely, the mother of the petitioner and the other respondents, was appointed as the managing director thereafter. After the death of the father, differences between the surviving family members cropped up resulting in filing of this petition.
2. When the petition was taken up for hearing, considering the family nature of the company, we suggested to the parties that they should try to work out an amicable settlement and towards this end, hearing of the petition was deferred from time to time. In a number of hearings, it was reported that the parties were negotiating a settlement. In the hearing on November 3, 1998, a consensus was arrived at by which the petitioner would sell his shares to the respondents but the price for the shares could not be agreed upon. While the respondents offered a sum of Rs. 89 per share on the basis of current value of fixed assets, the petitioner demanded a lump sum of Rs. 1.25 crores for these shares and also reimbursement of all the money that he had spent towards the company account. The price of Rs. 1.25 crores for the shares of the petitioners was not acceptable to the respondents and as such the compromise efforts failed. In the meanwhile when the compromise talks were going on the petitioner filed a few applications for interim relief, which were all heard along with the main petition.
3. One main issue in this petition relates to the claim of the petitioner that an industrial shed bearing No. 42, Wazirpur Industrial Complex, Delhi, which stands in his personal name but in the possession of the company, belongs to him and not to the company while the respondents assert that this shed was a part and parcel of the partnership firm and when the company took over the partnership business, all the assets and liabilities including the shed were taken over by the company. Even though in the petition the petitioner has not sought for any direction relating to this shed, in Company Application No. 256 of 1998, he has sought for directions to the respondents to hand over peaceful and vacant possession of the shed together with payment of arrears of rental of about Rs. 50 lakhs for the use of the shed by the company in the past. According to the respondents, the shed was always shown as a lease hold property of the company in the accounts of the company till 1992 and was later surreptitiously removed by the petitioner from the accounts of the company, after the death of the father in 1992, as the petitioner was in charge of the accounts of the company. Further, they also assert that the petitioner never made any demand for payment of rental for this shed at any time as he was fully aware that the shed belonged to the company. We do not propose to elaborately deal with this matter inasmuch as the petitioner has already filed a civil suit regarding this matter and as there is no prayer relating to the shed in the main petition.
4. In the petition, the petitioner has classified certain actions of the company as acts of oppression and certain others as acts of mismanagement. One act of oppression relates to non-issue of share certificates for the shares held by the petitioner. According to the company, share certificates have been issued to all the shareholders and in case the petitioner desires to obtain duplicate share certificates, the company is prepared to issue the same in accordance with the established procedure. In view of this, the petitioner may apply for duplicate share certificates which the company shall issue in accordance with law.
5. Another act of oppression is the apprehension of the petitioner that he was likely to be removed as a director, which apprehension later became a reality after the petition was filed and the petitioner moved C. A. No. 281 of 1998 on January 7, 1999, challenging the removal on various grounds.
6. Dealing with this application, Shri Gupta, advocate for the petitioner, submitted that some time in November, 1998, he received a letter from the company that the petitioner had been removed as a director with effect from September 24, 1998. On an inquiry it was found that the company had filed Form No. 32 with the Registrar of Companies on September 24, 1998, that the petitioner was removed as a director on that date. According to him, the established procedure of law had not been followed in this regard and that unmindful of the compromise efforts that were going on, the respondents have removed the petitioner as director even without proper notice to him. Referring to the reply filed to this application that the petitioner was removed as a director in the EOGM held on September 24, 1998, he submitted that no notice for this meeting was received by the petitioner. He also pointed out that the respondents have not given any evidence for having sent the notice of this meeting to the petitioner in the original reply to the application. Only when the petitioner filed a rejoinder to the reply, the respondents filed an additional affidavit enclosing therewith a copy of a special notice issued under section 190 read with section 284 of the Act, a copy of the notice for the board meeting convened to consider the special notice and copies of the UPC for notices sent for the board meeting and the extraordinary general meeting. Drawing our attention to these documents, Shri Gupta, pointed out that this petition was filed on August 19, 1998, and was served on the respondents on August 20, 1998, and the respondent shareholders had given a special notice for the removal of the petitioner as a director on August 22, 1998. The respondent directors who also happened to be the signatories of the notice, considered this notice on August 28, 1998, and convened a meeting of the board on September 1, 1998, for considering this notice. Even though the respondents have attached a copy of the UPC to evidence sending of notices of this board meeting, he pointed out that the UPC has been obtained from Malviya Nagar Post Office which is about 30 kms. away from Karampura where the registered office of the company is located. Further, the minutes of the board meeting indicate that the petitioner was given leave of absence while he never asked for the same since he had not received the notice of the meeting. In the same way he also pointed out that, the UPC produced to evidence sending of notice for the EOGM has also been obtained from the same Malviya Nagar Post Office. This notice was not at all received by the petitioner as he would have definitely attended the EOGM since the only item for consideration was about his removal. Therefore, his contention is that these UPCs are fabricated ones, just to show that notices were sent to the petitioner, while no notice was actually sent. Further, one other relevant fact was brought to our notice by Shri Gupta. That is, on September 1, 1998, the day on which the board alleged to have met to consider the requisition, a hearing had taken place before the Company Law Board at 3.30 p.m. when both respondents Nos. 3 and 4 were present as seen from the attendance sheet, Nothing was mentioned about this board meeting at that time. Therefore, he submitted that decisions taken in a meeting without notice to the director/a substantial shareholder should be declared as null and void.
7. Shri Ganda, advocate for the respondents, dealing with this issue, submitted that the genuineness of the UPC cannot be questioned. According to him, the advocate of the company is having his office in Malviya Nagar and as such the notices prepared in his office were posted from Malviya Nagar Post Office. According to him, the shareholders have every right to remove a director and this right has also been affirmed by the Supreme Court in Life Insurance Corporation of India v. Escorts Limited [1986] 59 Comp Cas 548. The shareholder directors decided to remove the petitioner only because the petitioner was acting against the interests of the company by writing to the bankers of the company to stop operation of the account and he has been directly dealing with the customers of the company asking them to stop all the payments due to the company. Because of this, substantial amounts due to the company are outstanding. In this connection, he referred to annexures I and II in the reply to the application. He further submitted that the petitioner, after having received notices, purposely did not attend the meeting as he was fully aware that he would be removed as a director since the respondent shareholders have controlling shares in the company. As far as leave of absence is concerned, he submitted that in the normal course, for all family members, such leave of absence used to be granted even without any request.
8. As far as this issue is concerned, while we concur with the stand of the respondents that shareholders have full right to remove a director, yet, such right is not unrestricted in a family company and an aggrieved shareholder director can always complain of oppression even if the removal is in accordance with law. A family company is one in which there is some special relationship between the shareholders and the normal rule of law relating to other companies cannot be straightaway applied. When there is a complaint of oppression, this special relationship will have to be taken into account while examining the complaint, more particularly a complaint relating to expulsion from the management as decided in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492 (HL). In the present case, right from the incorporation of the company all the shareholders have been having more or less equal number of shares and had been full time directors, indicating therein, that, equal shareholding and joint management had been the foundation of the association in the garb of a company. Any disturbance in this foundation by any of the shareholders could be claimed to be an act of oppression warranting winding up of the company on just and equitable grounds. For this proposition, we draw support from the Company Law Board decision in Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. [1997] 1 Comp LJ 268. Therefore, the removal of the petitioner from the board is undoubtedly an act of oppression against a minority shareholder. Further, we also find that the removal has also not been in accordance with law. When the other shareholders desired his removal, considering the strained relationship, the board of directors should have been much more alert and careful in ensuring that the petitioner was served notices for the board meeting as well as EOGM. While, we do not doubt the genuineness of these meetings as the relevant Form No. 32 was filed immediately after the EOGM, yet, we find substance in the arguments of the counsel for the petitioner that due notices had not been sent to the petitioner for various reasons pointed out by him including the fact that the company was never in the habit of sending notices by UPC at any time prior to these meetings. Even assuming that proper notices had been sent, yet we have already held that the removal of the petitioner as a director is an act of oppression. However, we are not giving any directions in this regard for reasons recorded later.
9. Another allegation of the petitioner is that the company has not been informing him about the activities of the company and that he has been denied the right to inspect various statutory records of the company which he is entitled to as a director and a shareholder. According to the company, this allegation is baseless inasmuch as the petitioner, as a director, had been signing ail documents and he is in possession of the same. Even otherwise, the company has stated that it is prepared to provide any document that may be needed by him. In view of this, he is at liberty to seek inspection of all the documents which he is entitled to as a shareholder by giving 15 days notice in writing to the company and the company shall offer inspection of such documents as required by him within seven days thereafter.
10. He has also alleged that the company has not been holding board meetings after the death of his father. According to the respondents, the board meetings were being held regularly and the petitioner himself had been a signatory to the annual accounts, annual returns which were filed with the ROC, after approval by the board. Since, as per law the company is to hold periodical board meetings, we direct the company to hold board meetings and general body meeting in accordance with law.
11. There are two other allegations which are only apprehensions, that the company is proposing to alter the articles of association to provide for making respondents Nos. 3 and 4 permanent directors and that the company is contemplating to issue further shares to respondents Nos. 3 and 4. Both these allegations have been denied by the company. In view of this, there is no need to give any direction in these matters.
12. Another allegation of the petitioner is that the shares held by the father have been transmitted to respondent No. 2 who is the mother of the petitioner and other respondents in an arbitrary manner. According to the petitioner, as a legal heir, he is entitled to the proportionate portion of the shares held by the father. Instead of doing so, the respondents have transmitted all the shares to the mother. According to the respondents, 12,750 shares held in the name of the father were transmitted to the mother in accordance with the terms of the will executed by the father and the petitioner was fully aware of the same as he has been signing the annual returns of the company all these years wherein the shares have been shown in the name of the mother. We have seen a copy of the will executed by the father (enclosed at annexure B to the reply to the petition) wherein he has bequeathed 2,000 equity shares to the mother. This will is seen to have been executed in 1986. To find out how the company had transmitted 12,750 shares, we asked the company to furnish full details. According to the company, when the will was executed in 1986, the total subscribed capital consisted of 8,080 shares and these shares were held by the father the petitioner and respondents Nos. 3 and 4 at 2,020 each. Later, rights issues were made in 1987 and 1991 by which the holding of all these shareholders became 12,750 shares each (the holding of respondent No. 4 was 11,570). Since the will of the father mentioned "the shares in the company", all the shares held in his name were transmitted, with the consent of all the family shareholders, including the petitioner, to the mother, second respondent, in October, 1993. Further, rights issue was made in April, 1996, and all the shareholders including the second respondent were allotted 50,000 shares each, by which each of the three shareholders, now holds 62,750 shares except respondent No. 4 who holds 61,750 shares. Thus, the facts reveal that the petitioner has all along been aware of the transmission of the entire shareholding of the father to the mother and he was also a party to the allotment of the rights shares to her thereafter. Even though the petitioner has made allegations of wrongful transmission of shares to the mother in the petition, he has not sought for any relief in this regard except that, in the rejoinder, he has averred that after the death of his father, the shares held by him should have been distributed and appropriated among the legal heirs of the deceased. If the petitioner's contention was that the transmission of more than 2,000 shares as stipulated in the will of his father was wrong and that such transmission should be set aside, we could have perhaps considered his contention. But if he were to assert that the shares held by his father should have been distributed among the family members, then, it is a matter for the civil court to consider in terms of the provisions of the Succession Act. Any way, as we have already pointed out there is no prayer either in the petition or in the rejoinder in this regard and as such we refrain from giving any finding on this allegation.
13. There are other allegations in the petition relating to siphoning off of the company funds by the respondents and other financial irregularities. No details have been furnished to substantiate these allegations other than making these allegations. In view of this, as rightly pointed out by the counsel for the respondents that allegations without particulars merit no consideration, we do not propose to look into these allegations.
14. The petitioner has filed two other applications C. A. No. 258 of 1998 and 259 of 1998. In both the applications, he has made certain claims against the company with a prayer that directions should be given to the company to honour these claims. In C. A. No. 258, he has claimed a sum of about Rs. 31.94 lakhs, being the amount paid by him to various suppliers from time to time for supplies made to the company and in C. A. No. 259, he has claimed a sum of about Rs. 14.63 lakhs stating that this represents unsecured loans given by him to the company as exhibited by unsecured loans summary prepared by the company as on July 30, 1998. In regard to C. A. No. 258, the contention of the respondents is that the petitioner has already filed Civil Suit No. 2517 of 1998 before the Delhi High Court for recovery and rendition of accounts and as such he cannot agitate the same in the present proceedings. Further, they have also stated that the petitioner has not given any details as to when and for what materials the petitioner had paid the amount and on what dates. According to them any payment to the suppliers could have been made only with reference to records of the company, which, according to the petitioner himself, were not made available to him. Therefore, according to the respondents, the claim in C. A. No. 258 is a bogus one and the company is not liable to pay the same. As far as C. A. No. 259 is concerned, the respondents have stated that there have been transactions of credit and debit between the petitioner and the company and once the accounts are reconciled, whatever amount may be due to the petitioner, would be paid. As far as these claims are concerned, they do not relate to the status of the petitioner as a share holder and as such, strictly speaking, they cannot be grounds in a Section 397/398 petition. But, as we have already pointed out, in a family company, it is not possible to differentiate the rights and liabilities of a family shareholder in a different manner. However, in this instant case, the respondents have shown their willingness to meet his claim in C. A. No. 259 after reconciliation of the accounts which may be done within a month from the date of this order. As far as the claim in C. A. No. 258 is concerned, the petitioner may pursue his claims in the civil suit which he has already initiated.
15. We have given our findings/directions on various allegations. The only substantial relief that could have been given by us in the petition is to put the petitioner back as a director on the board as we have held that his removal was not in accordance with lawful procedure and was an act of oppression. However, such restoration is only likely to create further friction between the parties and further litigation. In a Section 397/398 petition, the interest of the company has to be given priority, while passing any order with a view to bring to an end the matters complained of. The relationship between the parties is so strained that the family members holding about 75 per cent. shares have joined hands against the petitioner and, therefore, the only way, as we repeatedly pointed out during the hearings, by which the disputes between the parties could be put an end to and the interest of the company protected, is that the petitioner, being a minority shareholder should go out of the company by selling his shares to the respondents. Even though this suggestion was accepted by both the groups, yet, the price for the shares could not be mutually agreed. As against the price of Rs. 89 per share offered by the respondents, on the basis of the current value of land and buildings, which would work out to Rs. 55.84 lakhs for 62,750 shares held by the petitioner, the latter demanded a lump sum of Rs. 1.25 crores. Since we find that there is a large gap between the offer of the respondents and the demand of the petitioner, considering the fact that the valuation done by the respondents do not take into account all the fixed assets and also the profit earning capacity of the company, which should also be taken into account in computing the value of the shares, we consider it appropriate, in exercise of our powers under Section 402 of the Act, to appoint an independent valuer to value the shares so that the shares held by the petitioner could be purchased by the respondents. Accordingly, both the sides will appear before us on April 23, 1999, at 4.30 pm to suggest the name of a valuer acceptable to both the sides so that we could appoint him to value the shares of the company. With this direction, we dispose of this petition, however, reserving the right to pass further orders on appointment of the valuer and deciding the price for the shares.