Company Law Board
Nikhil Mohanbhai Majithia vs Babul Products (P.) Ltd. on 20 February, 2006
Equivalent citations: [2007]139COMPCAS851(CLB), (2006)6COMPLJ154(CLB), [2006]71SCL26(CLB)
ORDER
S. Balasubramanian, Chairman
1. When this petition was mentioned on 7-2-2006, I passed the following ex parte order: "Petition mentioned and interim relief sought ex parte. Heard extensive arguments of the counsel for the petitioner. Considering the fact that in view of the Supreme Court direction freezing the use of 'Babul' by any of the parties, the company is not doing any business, it is necessary to protect the assets of the company as also withdrawal of cash. Accordingly, I direct that there shall be no banking operation except towards payment of statutory dues and payment to employees, if any, other than the respondent employees till the respondents enter appearance to seek modification of this order. Status quo with regard to assets of the company as of date to be maintained. Petitioner to serve a copy of this order along with a copy of this petition on all respondents forthwith. They should file replies by 10-3-2006 and rejoinder to be filed by 31-3-2006. The petition will be heard on 19-3-2006 at 10.30 AM".
2. The respondents have filed the instant application CA 61 of 2006 seeking for vacation of the said ex parte order or in the alternative modify the said order permitting bank operation and for submitting regular accounts to this Board and for maintaining status quo in regard to fixed assets.
3. Shri Anil Diwan appearing for the applicant respondents submitted: This Board has erred in passing ex parte order without giving any reason as to why such an order happened to be passed without notice to the respondents. The provisions of Code of Civil Procedure being applicable to a proceeding under the Companies Act, 1956 as held in Sangramsinh P. Gaekwad v. Shantadevi P. Gaekwad , this Board was bound to comply with Order 39, Rule 3 of that code. In terms of this rule, before granting any interim injunction, notices should be given to the opposite party except where the court is convinced that delay in granting injunction would defeat the purpose of the injunction and even in such cases the court should record its reasons for granting ex parte injunction. In the impugned ex parte interim order, no reason has been recorded as to why ex parte order was given without notice to the respondents. Therefore, the said order has become vitiated for not recording the reasons for the Board's opinion that the object of granting injunction would be defeated by delay. In Shiv Kumar Chaddha v. Municipal Corporation of Delhi , the Supreme Court has held that an ex parte order without recording reasons would vitiate the order. Similarly in Morgin Stanley Mutual Fund v. Kartick Dass , the Supreme Court has held that ex parte order could be granted only under exceptional circumstances and that reasons should be recorded for grant of ex parte order. In the same judgment, the court has also held that before granting the ex parte order, the court should also examine whether the plaintiff had acquiesced for some time and in circumstances it would not grant ex parte injunction. In the present case, the reasons recorded in the order of this Board was that the Supreme Court had frozen the trade mark "Babul". The Supreme Court passed the said order in March, 2005. The petitioner has kept quite for over a year and as such he had acquiesced to the present state of affairs for over a year and as such there was no urgency to pass the ex parte order without notice to the respondents. As a matter of fact, correspondences were exchanged between the petitioner and the respondents in May and June, 2005 where after the petitioner had kept quite.
4. The learned Counsel further submitted: The ex parte order freezing the bank operation has adversely affected the reputation of the respondents. Further, the respondents have given some post dated cheques for purchase of cars for the company and if the ex parte orders were to continue, the cheques would bounce resulting in criminal prosecution against the respondents. The said order has also prevented the respondents from drawing their remuneration which they have been drawing all along. In view of the Supreme Court order freezing the use of "Babul", the company is exploring possibility of diversification for which it would need funds. Therefore, the ex parte order freezing the bank accounts should be vacated.
5. Shri Dave appearing for the respondents vehemently argued that this Board was persuaded to pass the impugned ex parte order without revealing the relevant facts that the Supreme Court order was passed in March, 2005 and as such there was no urgency to pass any ex parte order without notice to the respondents. Therefore, he urged that the ex parte order should be vacated forthwith.
6. Shri Sarkar, Senior Advocate, appearing for the petitioner submitted: It is wrong on the part of the respondents to allege that full facts were not placed before this Board before grant of ex parte interim order. The order of the Supreme Court was referred to including the date of the order and reference was made to the balance sheets of 2003-04 wherein substantial funds were found available in the bank accounts of the company. The counsel also expressed his apprehension that if notice of mentioning were given to the respondents, they were likely to withdraw funds from the company. Taking these aspects into consideration, this Board passed the impugned order. Even in the present application seeking for vacation of the order, the respondents have not given adequate justification as to why the interim order should be vacated. In terms of Order 39, Rule 4 of CPC, if the respondents seek vacation or modification of an interim injunction, they should give justification. Their main object of seeking for vacation of the order is to enable them to draw remuneration, which they are not entitled as the company is not doing any business. The respondents are carrying on a competing business and if they are allowed to operate the bank accounts, they are likely to divert the funds of the company to their own business. There has been no Board Meeting or General Meetings for the last two years. No diversification of business is possible without the same being approved either in a board meeting or in a general meeting. Therefore, in guise of diversification, the respondents are likely to divert the funds of the company. In the present case, they have given no justification and therefore, the ex parte order dated 7-2-2006 should be confirmed.
7. Shri Sundaram appearing for respondents 5 to 7 submitted: The entire foundation of the application that no reason has been given for passing the ex parte order is baseless. This Board has given adequate reason that the said order was being passed to protect assets and funds of the company. His clients hold 28 per cent shares in the company and are supporting the petitioner holding 12 per cent shares. Thus, they collectively hold 40 per cent shares against the respondents holding 60 per cent shares. The company is a family company and the respondents are running the business of the company for their own benefits. When the company is not doing any business, the question of drawl of remuneration by the respondents at the same level as they were drawing at the time when the business was running, does not arise. Even though, his clients 28 per cent shares, they have not drawn a single pie as remuneration while the contesting respondents collectively draw more than Rs. 4 crores per year as remuneration. The company being a family company, the profit of the company should be equitably distributed amongst members. While drawing huge remuneration, the respondents are not paying adequate dividends to other family members in spite of huge profits. The respondents have not given any justification in the application to seek for vacation/variation of the order dated 7-2-2006. When the company is not doing any business and when there are no board meetings or general meetings for over two years, by vacating the interim order, the respondents should not be allowed to siphon off the funds of the company. Therefore, the interim order should be confirmed.
8. I have considered the matter carefully. The said order was passed, as recorded in the order itself, after hearing the extensive arguments of the counsel for the petitioner. As a matter of fact, before passing the order, I specifically enquired from the counsel as to why notices should not be issued to the respondents and pointing out the funds availability in the bank accounts of the company, he expressed the apprehension that if notices were issued, there was a likelihood of the respondents withdrawing the funds from the bank accounts. Perhaps, I could have recorded this statement in my order but not recording the same cannot be a ground for vacating or modifying the said order, as repeatedly contended by Shri Diwan that the said order was vitiated for non-recording the reasons. In both the Supreme Court cases cited by Shri Diwan, the court had not vacated the interim order even after pointing out the need to strictly comply with the provisions of Order 39, Rule 3. As a matter of fact, in ICICI v. Grapco Industries Ltd. , a copy of which was given by Shri Diwan, the Supreme Court has frowned upon the High Court when the High Court vacated an ex parte order on the ground that the Tribunal had not given any reason while passing the ex parte order. In paragraph 14 of the judgment, the Supreme Court observed "When the facts of the case brought before the High Court are such that the High Court itself can correct the error, then it should pass appropriate orders instead of merely setting aside the impugned order of the Tribunal and leave it everything in vacuum". In view of this observation of the Supreme Court, the ex parte interim order cannot be vacated only on the ground that it was vitiated as contended by Shri Diwan. Instead, the respondents are bound to give justification to do so. It is to be noted that in the present case, the ex parte order dated 7-2- 2006 was to operate till the respondents entered appearance to seek modification of the order. Now that the respondents have entered appearance, they should give justification for seeking the vacation/modification and cannot simply contend that since the order dated 7-2-2006 is vitiated on account of non-compliance with order 39, Rule 3 and as such it should be vacated.
9. The admitted position is that the company is a family company and the respondents hold 60 per cent shares while the other two groups supporting each other hold 40 per cent shares in the company. It is also an admitted fact that company is not doing any business. In the application, other than a mere statement that the company is planning to diversify, no details have been furnished. In respect of remuneration, in paragraph 10 of the application, it is stated that effective from March, 2005, there is no commercial production/sales and therefore, no commission is being paid to any of the directors. In the statement of monthly salaries attached with the application, it is shown that respondent No. 2 was drawing a monthly remuneration of Rs. 15 lakhs in 2003-04, Rs. 17.5 lakhs in 2004-05 and Rs. 17.5 lakhs in 2005-06. In the statement at page 89 of the petition, the annual remuneration/commission drawn by the directors, it is shown that the 2nd respondent had an annual drawl of Rs. 1.8 crores which works out to Rs. 15 lakhs per month. Therefore, it is, not clear whether the monthly remuneration includes commission also or exclusive of commission. Whatever it is, the company being a family company, when the company is not functioning, the directors cannot draw the same remuneration that they were drawing while the company was functioning. Therefore, I find justification in the contention of the petitioner that allowing one group holding 60 per cent shares to draw remuneration when the company is not doing any business will not only be prejudicial to the interest of the company but also the other groups collectively holding 40 per cent shares in the company. However, at the same time, I am also of the view that putting a complete ban on drawl of remuneration would also be against the interest of the respondents.
10. Accordingly, I modify the ex parte order dated 7-2-2006 in the following terms: " The company is authorized to operate the bank accounts subject to (1) The directors shall draw only l/3rd of the monthly remuneration that they were drawing in 2003/2004 (2) All statutory payments may be paid (3) There shall be no withdrawal for diversification except after a decision is taken in a board meeting with a week's notice to the petitioner (4) No money shall be utilized except for specific business purpose of the company (5) There shall be no transaction of over Rs. 5 lakhs without one week's notice to the petitioner giving full details of the transaction (6) A fortnightly statement of receipts and payments shall be given to the petitioner beginning from the period from 1-2-2006. Status quo with regard to the fixed assets of the company as of date is to be maintained.
11. The application is disposed of in the above terms.