Company Law Board
Dale & Carrington Investments (P.) Ltd. vs P.K. Prathapan on 16 February, 2001
Equivalent citations: [2002]111COMPCAS410(CLB)
ORDER
Balu, Member
1. The petition CP No. 13 of 1999 is filed under section 111 of the Companies Act, 1956 ('the Act') by Dale & Carrington Investments (P.) Ltd. ('the company') for rectification of the register of members of the company in respect of 5,000 equity shares impugned in the petition by deleting the name of respondents 1 and 2 and restoring the name of the third respondent.
2. The petition CP No. 65 of 1999 is filed under sections 397 and 398 of the Act alleging that the affairs of Dale & Carrington Investments (P.) Ltd. ('the company') are being conducted in a manner prejudicial to the interest of the petitioners and seeking the following reliefs :
(a) to declare that any issue of shares to any member of the company apart from the initial issue of 7,100 shares is null and void and rectify the register of members accordingly;
(b) to remove the second respondent from the office of Managing Director of the company;
(c) to supersede the board of directors of the company;
(d) to appoint an administrator to take charge of the affairs of the company and cause an investigation into the affairs of the company; and
(e) to surcharge the respondents who are found guilty of diversion and mismanagement;
3. The alleged acts of oppression and mismanagement relate to the following :
(i) Illegal allotment of 17,865 equity shares of the company in favour of respondents 2 to 5, 8 and 11;
(ii) The aets of the second respondent in respect of the management and affairs of the company in a manner prejudicial to the interests of the petitioners; and
(iii) Manipulation of the records and documents of the company to the detriment of the petitioners and misuse of the funds and assets of the company by the second respondent.
4. The petitioner (CP No. 13 of 1999} being the company is the first respondent in CP No. 65 of 1999. The respondents 1 and 2 (CP No. 13 of 1999) arc the petitioners in CP No. 65 of 1999. The reliefs sought in both the petitions are substantially the same. In view of this, both these petitions were heard together and as such arc being disposed of by this common order.
5. Shri C. Harikrishnan, senior advocate appearing for the petitioners (CP No. 65 of 1999) while initiating arguments submitted that the company was incorporated in November, 1986. The petitioners holding 2,500 shares each out of the issued capital of 24,965 shares, which is under dispute arc competent to file the petition under section 399 of the Act. Apart from the company and the eleventh respondent, the parties arc related to each other. The petitioners were living in Muscat for the past more than 21 years and were desirous of starting a business in their native place to support their family and for the future benefit of their children. The second respondent working in the United Kingdom had returned to Trissur in the year 1983 and was looking for a suitable employment. Both the petitioners and the second respondent could identify an existing hotel by name Hotel Sidhartha, which they wanted to acquire and run hotel business with the intention to hand over the hotel to the petitioner when they return to India permanently. Accordingly, the company was incorporated and the requisite formalities were completed by the second respondent. The understanding among the petitioners and the second respondent was that the petitioners would be the majority shareholders in the company and that the second respondent would hold minority shares in the company. The business would be run in mutual trust and confidence. Accordingly, the first petitioner remitted Rs. 5 lakhs on 3-3-1987 to the second respondent. The petitioners b'ing non-resident Indians, the amount of Rs. 5 lakhs was remitted in the name of the first petitioner's mother to avoid compliance with foreign exchange formalities. The seventh and eleventh respondents had each invested Rs. 50,000 and one Dcvaki Rs. 60,000 to acquire the hotel business. The hotel was acquired by payment of Rs. 6 lakhs to the erstwhile owners and the existing liabilities of Rs. 18 lakhs were taken over by the company to be discharged in due course. Thereafter, the first petitioner at the request of the second respondent had remitted for running the hotel the follwing amounts :
(a) A sum of Rs. 1 lakh in March, 1989.
(b) US $ 6300 in favour of Maruti Udyog Ltd. for allotment of a vehicle for the use of second respondent, in November, 1991.
(c) A sum of Rs. 1 lakh in February, 1994.
(d) A deposit of Rs. 1 lakh with State Bank of India in the year 1996 to provide bank guarantee in favour of the Sales Tax Authorities at Kerala.
(e) A sum of Rs. 9 lakhs in January, 1996 for making remittance in favour of the Sales Tax Authorities.
According to the petitioners, the above remittances were made upon the assurance and belief that the petitioners would be issued further shares in the company and that the allotment of shares would be in accordance with the remittances made by them. All the remittances were made in individual name of the second respondent on his representation that there would be delay in clearing if remittances were made in the name of the company. However, the petitioners were only allotted 2,500 each shares and accordingly received the share certificates which represent the amount of Rs. 5 lakhs originally paid by the petitioners. The business was carried on by the second respondent with the assistance of the seventh respondent as manager of the hotel and the eighth respondent, brother of the second petitioner. While so, in the beginning of 1998, a hotel by name Hotel Luciya close to the hotel run by the company came for sale which the first petitioner desired to acquire and run by the company. However, the second respondent did not show any interest in expanding the business by acquiring Hotel Luciya. The first petitioner was left with no option but to acquired Hotel Luciya in August, 1998. The petitioners, being residents of Muscat could not look into the affairs of the company. However, on the enquiries made during their visit to India they came to know of the following irregularities in affairs of the company :
(i) The hotel business of the company was run in partnership between the second and seventh respondents as if they were the partners of 'Hotel Sidhartha'.
(ii) The second respondent was convicted by the First Class Judicial Magistrate, Chalakudy under section 150 read with section 63 of the Abkari Act for having violated the terms of the licence and selling liquor in the hotel premises.
(iii) The Sales Tax Authorities had imposed a huge penalty on the hotel for not maintaining the proper books of account and for evading Sales Tax.
(iv) The company has not been maintaining proper records for its transactions.
(v) The second respondent was obtaining renewals of the licence of 'Hotel Sidhartha' in the partnership name and not in the name of the company.
(vi) The company was reported to have increased its authorised capital from time to time.
(vii) The annual return made up to 27-9-1990 and 30-9-1991 would reveal the shareholding pattern of the members as under :
Authorised capital Rs. 15 lakhs Issued capital Rs. 7,10,000 No. of shares 7,100 Shareholding pattern The second respondent 100 The third respondent 100 The fourth respondent 200 The fifth respondent 50 The seventh respondent 500 The eighth respondent 50 The eleventh respondent 500 The first petitioner 2,500 The second petitioner 2,500 Devaki 600 Thus, as at 30-9-1991, the petitioners were holding 5,000 shares of the issued capital accounting to 70 per cent of the issued capital of the company. It transpired that the second respondent was allotted 6,865 shares in October, 1994. The annual return made up to 23-12-1995 reveals that the second respondent was holding 7,565 shares and that 600 shares belonging to Devaki were transferred to the second respondent. The authorised capital was found to be increased from Rs. 15 lakhs to Rs. 25 lakhs in September, 1996. However, the minutes of the proceedings of the ninth annual general meeting held on 30-9-1996 do not speak of any resolution increasing the authorised share capital of the company. It is further transpired that the second respondent was allotted additional 9,800 shares in April, 1997 and 1200 shares in favour of respondents 4 to 6 and 8. The annual return made up to 30-9-1997 shows that the authorised capital of the company was further increased to Rs. 35 lakhs and that the second respondent was holding 17,365 shares. The second respondent was allotting additional shares from time to time by adopting dubious methods and filing fabricated records and documents with the various statutory authorities and without complying with requisite provisions of the Act. According to the petitioners, the respondents 2 and 3 did not contribute any money in excess of Rs. 20,000. The second respondent had committed fraud and breach of trust and with active connivance of the respondents 3 to 6, the petitioners were eliminated from the affairs of the company. The alleged issue of additional shares in favour of the respondents are illegal and cooked up. They are supported by mere book entries and was never with the knowledge of other shareholders. The second respondent had filed various fabricated statutory returns with the intention of totally taking control of the company. No meetings of the Board or general body were held increasing the authorised capital of the company and allotting additional shares in favour of the respondents from lime to time. By illegal allotment of additional shares in favour of various respondents, the existing majority shareholding of the petitioners was reduced to minority. Shri Harikrishnan has pointed out that the company had allotted additional shares in favour of the respondents without bringing in any additional funds to the company and in exclusion of the petitioners, This act of allotment of shares without augmenting funds in exclusion of the petitioners amounts to an act of oppression and in this connection, he relied upon the decision of the Company Law Board in Ananda Mandhiram Hotels (P.) Ltd, [2000] II CLJ 120. The second respondent had mismanaged the affairs of the company and misused the monies and assets of the company including the car acquired for the business of the company. The second respondent had siphoned of monies from the company by manipulation of accounts and records of the company. The second respondent was diverting the funds of the company by making false entries from time to time.
6. Shri Harikrishnan reiterated that the payments made by the petitioners in favour of the second respondent, though not made in the name of the company were made for the business of the company with specific understanding that shares would be allotted in tune with the payments made by the petitioners. Shri Harikrishnan has further pointed out that the first petitioner, apart from payments referred to earlier, had made payments for the personal dealings of the first petitioner in favour of the second respondent, fourth respondent and 10th respondent. He cited the various personal payments made by the first petitioner. He invited our attention to the various tetters {Annexures P-38 to P-44) written by the second respondent addressed to the first petitioner requesting for funds for carrying on hotel business and Annexures P-38 and 44, to show that the second respondent was desparately persuading the petitioner to start hotel business at Kerala. He referred to a letter dated 5-3-1989 (Annexure P-2) of the second respondent, according to which the first petitioner was dragged by the second respondent into the hotel business. He further reiterated that 2,500 shares were allotted in favour of each of the petitioners and not in the name of the mother of the first petitioner. He denied the transfer of shares by the first petitioner's mother in favour of the petitioner. There is no necessity to obtain permission from the Reserve Bank of India for allotment of the shares in favour of the petitioners, especially when none of the records of the company show that the petitioners were NRIs. At any rate, he further pointed that it is for the company to make an application if need be to the RBI for permission to allot the shares in favour of the petitioners. Accordingly, the allotment of shares in favour of the petitioners cannot be challenged for want of approval of the RBI. Shri Harikrishnan has, therefore, sought for the reliefs claimed in the petition. Shri Harikrishnan relied upon the following decisions in support of his contentions :
• Bellador Silk Ltd, In re [1965] I All ER 667 and • Rajiv Melita v. Group-4 Securitas Hindustan (P.) Ltd.[2000]99 Comp. Cas. 57 (CLB) to state that--
If the transferee of shares happens to be a non-resident Indian then, permission would be required under the Foreign Exchange Regulation Act, 1973, from the Reserve Bank of India and until such permission is obtained, the company cannot register the transfer of shares in respect of such non-resident transferee. But once the permission is obtained whether before or after the purchase of shares, the company cannot refuse to register the transfer, nor is it open to the company or anyone else to decide whether permission is rightly granted by the bank or not. Therefore, the question of obtaining permission will only be relevant, at the time of the registration of the transfer. The rights and obligations of the respective parties, i.e., the seller and the buyer are governed by the terms of the agreement between the seller, being the transferor and the buyer, being the transferee.
• Maritime Electric Co. Ltd v. Jain Dairies Ltd AIR 1937 PC 114.
7. Shri G.V. Subramanian, advocate for the respondents 1 and 2 while refuting the charges made by the petitioners submitted that the company was incorporated as early as in November, 1986 with the respondents 2 and 3, as the first shareholders and signatories to the memorandum and articles of association of the company. 'Hotel Sidhartha' was acquired in March, 1987 and the hotel business was carried on since March, 1987. It was only the second respondent who had negotiated and acquired the hotel. The petitioners had invested Rs. 5 lakhs only in March, 1987 and at the request of the mother of the first petitioner 5,000 shares were allotted in her favour on 30-3-1989. The shares could not be allotted in the name of the petitioners, they being Non-Resident Indians without permission of the RBI. However, at the request of the mother of the first petitioner, 5,000 shares were transferred in favour of the petitioners subject to the RBI approval. At this juncture, Shri Subramanian pointed out that under the Foreign Exchange Regulation Aet, unless and until the requisite permission is obtained from the RBI, shares cannot be held by a Non-Resident Indian. Accordingly, the shares were transferred in favour of the petitioners, subject to their obtaining approval from the RBI. The petitioners have not so far obtained permission of the RBI compelling the company to file the petition {CP No. 13 of 1999) for rectification of the register of members of the company deleting the name of the respondents 1 and 2 and incorporating the name of the third respondent. The petitioners (CP No. 65 of 1999) can become members only after obtaining the approval of the RBI and in such circumstances, they have no locus standi to maintain the petition before the CLB. According to the respondents, the petitioners had only invested Rs. 5 lakhs in the company. The other payments said to have been made by the petitioners were in connection with the personal transactions which the petitioners had in India, such as acquiring proper-lies, carrying out construction of the house for the first petitioner etc. Shri Subramanian specifically refuted that no payment was made by the petitioners in the name of the company and that too for the purpose of carrying on the business of the company or for settlement of sates tax dues of the company. These payments were never made by the petitioners for the purposes of carrying on the business of the company. The respondents 2 and 3 were directors of the company since 4-11-1986 and the third respondent retired on 15-12-1988. The seventh respondent was a director from 15-12-1988 to 1-10-1994. The eighth respondent was a director from 15-12-1988 till 30-9-1996. The allotment of shares were made while the respondents 7 and 8 were the directors who were parties to the allotment of additional shares. The respondents 7 and 8 being closely related to the petitioners cannot impugn the allotment of the additional shares. The first petitioner being a director from 3-9-1997 and the second petitioner since 1998 had access to the documents of the company so as to question the additional allotments and the various meetings held by the company. The seventh respondent who was involved in day-to-day affairs of the company indulged in the acts of indiscipline and misbehaviour resulting in his expulsion from taking part in the management of the company. This led to the litigation between the respondents 2 and 7. He further pointed out that the petitioners had acquired a hotel called Hotel Luciya in the year 1998 which is about 150 meters away from the company's place of business. The respondents 7 and 8 are involved in running the new hotel. The petitioners having acquired the hotel Luciya have realised that 'Hotel Sidhartha' which is located closely to the Hotel Luciya is a competitor. It is the new business acquired by the petitioners and run by the respondents 7 and 8 is the main cause for initiating the present proceedings against the respondents 2 and 3. In regard to the other charges, he submitted that the licence of the hotel is always in the name of the Managing Director and the second respondent never misused the licence standing in his capacity as Managing Director of the company. Shri Subramanian drew our attention to the letter dated 15-8-1992 of the petitioner (Annexure R-J6) to show that the petitioners had invested the amount in the company primarily in order to get a job for the seventh respondent and not for running the hotel by themselves at a later point of time. He also referred to the various letters exchanged between the petitioners and second respondent to show that the remittances were made towards the personal transactions of the petitioners and not on account of the company. The annual returns filed by the company and other statutory records will show the increase of capital and allotment of additional shares in favour of the second respondent and other respondents which cannot be now questioned by the petitioners. Shri G.V. Subramanian relied upon the following decisions in support of his legal contentions--
• Shaw v. Shaw [1965] 1 All ER 638 to state that - any payment in contravention of the Exchange Control Act, 1947 is an illegal payment and that the statement of claim would be struck out.
• Mrs. Shoba Viswanatha v, D.P, Kingstey [1996] 1 CTC 620 - to state that - any contract against the provisions of Foreign Exchange Regulation Act, 1973 will amount to enforcement of illegal contract and the provisions contained in the FERA have been enacted to safeguard the economic interest of India and any violation of the said provision would be contrary to the public policy of India.
The respondents 7, 8 and 12 adopted the arguments advanced on behalf of the petitioners and sought the reliefs made in the petition (CP No. 65 of 1999).
8. We have considered the pleadings and arguments of the counsel. Since the maintainability of the petition CP No. 65 of 1999 filed under section 397/398 depends on our decision in CP No. 13 of 1999, we shall first consider the latter petition. This petition was filed questioning the legality of allotment of shares to the petitioner without the RBI approval and thus questioning the maintainability of CP No. 65 of 1999, which was filed after CP No. 65 of 1999 was filed. The main ground on which the allotment of shares to the petitioner is questioned is that the petitioners were NRIs and as per section 29(1)(b) of the FERA, no shares could have been allotted to or transferred in the name of NRIs without the approval of the RBI. While the legal position relating to obtaining the RBI permission is not disputed, yet in the present case, the same has been questioned nearly 10 years after the allotment/transfer was made. Even this allotment/transfer was made only at the initiative of the second respondent as is evident from Annexure P-42 dated 25-2-1987 which reads as follows :
"To realise the cheque in the name of the company, we require the permission of Reserve Bank of India. They are delaying the things unnecessarily by asking several things. I went to Reserve Bank along with our auditor Mr. Krishna moor thy and tried our level best to speed up the process.They have no interest. We cannotdo our things aft er getting their clearance.
Hence you do one thing. Send a cheque for Rs. 5 lakhs either in the name of mother or Murali. That cheque should not cross or don't write account payee etc. Then the mother can endorse that cheque in company's name. The only problem is that the shareholding will be in mother's name. In this regard this is the only way left out. Write a letter to the Bank Manager also regarding this."
9. It is, therefore, clear that the second respondent was persuading the first petitioner to remit the amount of Rs. 5 lakhs in the name of the first petitioner's mother to ensure the allotment of shares without permission of the RBI. It is found that 5,000 shares were allotted for the aforesaid remittance made by the petitioner. According to the petitioners, the company had allotted 2,500 shares, each in the name of the petitioners 1 and 2 separately covered by share certificate Nos. 12 and 13 with distinctive Nos. 2051 to 4550 and 4551 to 7,050 respectively, as evidenced by the share certificates (Annexure P-32). However, it is contended by the respondents that the shares were allotted in favour of the first petitioner's mother in March, 1989 and subsequently transferred in the name of the petitioner's mother in November, 1989 and produced copies of instrument of transfer said to have been executed by the transferor as well as transferees annexed to the rejoinder in CP No. 13 of 1999. We deem it fit that it is not relevant to go into the question whether 5,000 equity shares were allotted by the company either in the name of the petitioners or allotted in the name of the first petitioner's mother and subsequently transferred in favour of the petitioner at this juncture. The fact is that 5,000 equity shares are now in the name of the petitioners and the holding of such shares is subject to approval of the RBI. In this connection, beneficial reference is made to LIC of India v. Escorts Ltd [1986] 59 Comp. Cas. 548 (SC), where it has been held that the RBI has the authority to give ex post facto permission under section 29(1)(&) of the FERA for purchase of shares in India by a company not incorporated in India and such permission does not necessarily have to be a 'previous' permission. Thus, the petitioners/company are at liberty to apply to the RBI for regularising the allotment/transfer of shares to the petitioners who are NRIs, if so advised. Accordingly, we reject the prayer of the petitioners in CP No. 13 of 1999 regarding rectification of register of members in respect of the 5,000 shares allotted/transferred to the petitioners.
10. In view of our holding that the petitioners arc entitled to 5,000 shares, the petition in CP No. 65 of 1999 is maintainable. In this petition, the main allegations of the petitioners are two fold. One relates to non-allotment of shares for various cash-remittances made by them and the second in regard to allotment of shares to the respondents group in exclusion of the petitioners. While, in spite of the first allegation, there is no prayer for allotment of shares for the cash-remittances made by them, in regard to the second allegation, the petitioners have sought for a declaration that all shares issued beyond 7,100 shares should be declared as null and void. In regard to the allegation relating to non-allotment of shares for the cash-remittances made by the petitioners, it is on record that none of the remittances alleged to have been made by the petitioners was in the name of the company nor indicated as being remitted towards consideration for the shares. While the respondents admitted certain remittances made, yet according to them they were not with reference to the affairs of the company, but wherein private nature. We do not propose to examine the veracity or the purpose for which the remittances were made in as much as none of the remittances was made to the company nor in the name of the company and these remittances had not found any piace in the account books of the company. Further, we also note that there is no prayer in regard to allotment of shares in respect of these remittances. As far as the allotment of further shares is concerned, the allegations of the petitioners are once again two-fold. One is that no consideration had been received in respect of the shares allotted to the respondents and the second is that by allotment of shares only to the respondents, the petitioners have been converted into a minority. It is contended by the petitioners that the company was incorporated for the benefit of the petitioners and their family members and they were majority shareholders holding 70 per cent shares in the year 1989. It is on record that the company was incorporated by the second and third respondents by subscribing 50 shares each and they were the signatories to the memorandum. The petitioners came into the company as shareholders only on 30-3-1989 when 7,000 shares were allotted afresh, of which 5,000 shares were allotted to the petitioners. We find that the company had increased its authorised capital from Rs. 1 lakh to Rs. 15 lakhs in an EOGM held on 10-2-1987 and from Rs. 15 lakhs to Rs. 25 lakhs in the AGM on 30-9-1996 and from Rs. 25 lakhs to Rs. 35 lakhs at the AGM held on 30-9-1997. The seventh respondent, who is the brother of the first petitioner was on the Board till October, 1994 and the eighth respondent, brother of the second petitioner was a director till 1996. Consequent to the increase in the authorised capital, further shares of 6,865 shares were allotted in a board meeting held on 24-10-1994 in favour of the second respondent against loans outstanding in his name and in a board meeting held on 26-3-1997, 11,000 shares were allotted to respondents 2, 4 to 6 and 8 against shares application money of Rs. 11 lakhs. Relevant Form No. 2 with the Registrar of Companies for these allotments are found to have been filed. It is also seen from the audited accounts for the years 1993-94, 1994-95 as well as 1996-97 that advances have been shown towards share capital pending allotment of shares and also as unsecured loans from these respondents. Therefore, it appears that the shares had been allotted against receipt of proper consideration for these shares. The petitioners have not adduced any evidence or material to show that any money has been siphoned off from the company for investment in the shares. Therefore, the allegations relating to non-receipt of consideration for these shares nor the consideration is paid out of money siphoned off from the company is not established.
11. Now the second limb of the allegation that the petitioners have been reduced into a minority by the allotment of shares has to be examined.
Even though, it is crystal clear from the pleadings as well as various documents placed before us that the second respondent and the first petitioner decided to join together to run the hotel, yet no material has been placed to indicate that the petitioners would be in majority and the respondents in minority for all the time to come. It is also worth noting that the petitioners, whatever may be the reason, did not participate in the management and as a matter of fact it is their main contention that the second respondent has kept them in dark about the affairs of the company. If the petitioners were to be in majority, it has not been explained as to why, even if they were not in a position to be in active management of the company because of the fact of being away from India, they did not even take interest to find out about the affairs of the company. We find that the company, for its progress had to mobilise additional funds, which it did through issue of shares and the issue of shares is not found to have been made with a view to convert the majority into minority. However, we do feel that when in 1987, a substantial amount of Rs. 5 lakhs was invested by the petitioners as share capital which was utilised in purchase of the hotel which is the only main business of the company, equity demanded that the petitioners should have been offered further shares as and when the company decided to mobilise funds. Therefore, we are of the view that by not even making an offer to the petitioners, the respondents had acted in an oppressive manner towards the petitioners. In the normal course, allotment of shares which resulted in an act of oppression would have been set aside, but we do not propose to do so in as much as the company has got the benefit of the investments made by the respondents. As we have already indicated that the petitioner has no basis to claim the majority, we cannot direct the company also to issue proportionate shares on the basis of the shareholding when the total number of shares in the company was 7,100. Therefore, considering the fact that the respondents have been managing this company right from 1989 in exclusion of the petitioners and that the petitioners have already acquired another hotel, we consider it appropriate not to give any. direction in regard to the further issue of shares, even though we have held that exclusion of the petitioners from allotment of shares was an act of oppression. However, with a view to protect the interest of the company from further litigation and also to ensure that the position of the petitioner being in minority is not further jeopardized, we give the option to the petitioners to sell their shares to the respondents. Since the company has not declared any dividend so far, we consider that the petitioners should get a return of atleast 12 per cent of their investment. Therefore, the petitioners are at liberty to sell their shares to the respondents at par value with 12 per cent simple interest per year right from the date of their investment. Once, the petitioners exercise this option, the same will be binding on the respondents. In case the petitioners choose this option, they should exercise their option in writing within a month from the date of this order by sending a notice to the company and the second respondent and the company/the second respondent should arrange to purchase these shares within three months thereafter. As and when the consideration is paid, the petitioners should execute blank transfer forms and hand them over to the respondents. In case, the company desires to purchase the shares, it is at liberty to reduce the share capital to that extent by the authority of this order.
12. With the above direction, we dispose of this petition.