Company Law Board
Saroj Hasmukh Patel And Ors. vs Kantilal Pranalal Patel And Ors. on 25 August, 2006
Equivalent citations: [2007]75SCL122(CLB)
ORDER
K.K. Balu, Vice-Chairman
1. In the company petition filed under Sections 397, 398 & 402 of the Companies Act, (the Act") alleging certain acts of oppression and mismanagement in the affairs of M/s Patel Cars Private Limited ("the Company"), the petitioners have made the present application, seeking directions of this Bench to restrain the respondents from removing the fifth petitioner from the office of director at the extra ordinary general meeting proposed on 17.08.2006. The matter has been extensively argued on 08.08.2006 for the parties. This Bench, for paucity of time, by an order dated 08.08.2006 directed that any resolution which may be passed at the extra ordinary general meeting will not be implemented by the Company.
2. According to Shri K..S. Ravichandran, learned authorised representative of the applicants, the board of directors of the Company at the meeting held on 24.07.2006. considered the special notice dated 14.07.2006 received from the respondents 10 & 12 for convening an extra ordinary general meeting and accordingly resolved to convene the general meeting on 17.08.2006 for the purpose of removing the fifth petitioner from the office of director. The fifth petitioner is the only director representing the petitioners group, collectively holding 20% of shares in the Company. The Company is a family company and the respondents are attempting to exclude the petitioners group from the day to day management of the Company, which will adversely affect the interest of one group of the shareholders. The fifth petitioner has been a director for the past several years and therefore, there should not be any change in the constitution of the board of directors of the Company without any justification. This proposed act of removal of the fifth petitioner, apart from violative of the provisions of the Act, is an act of oppression, being purused during the pendency of the company petition. The allotment of shares in favour of the twelfth respondent and his appointment as a director of the Company are being seriously disputed in the present proceedings, which made the respondents to convene an extra ordinary general meeting with the oblique motive of removing the fifth petitioner from the office of director. The fifth petitioner has not done any damage to the interest of the Company, while seeking to enforce his rights as a shareholder or director of the Company. The move of the respondents for removal of the fifth petitioner is motivated, unfair and oppressive which must be appropriately remedied by the Bench.
3. Shri A.K. Mylsamy, learned Counsel appearing for the respondents opposed the company application, on the following among other grounds:
• The Company is not a family company and the petitioners cannot seek any proportional representation on the board of the Company. The Company was incorporated as a public limited company in June 1997 and it was converted into a private limited company with effect from 14.08.2001. There has been no understanding among the shareholders for any proportional representation from each group of the shareholder, as claimed by the petitioners. The Memorandum of Association of the Company is silent on any such arrangement among the shareholders.
• The petitioners have not pointed out any infirmity or illegality in restraining the shareholders from considering the resolution of removal of the fifth petitioner as a director at the extra ordinary general meeting, as proposed by them. The Bench shall not interfere in the day to day management of the Company and any order of injunction restraining the Company from proceeding with the resolution will tantamount to interfering with the day today affairs of the Company. Any meeting which has been properly requisitioned by the members under Section 169 of the Act cannot be stayed so long as the provisions of the Act are duly complied with. It is the exclusive prerogative of the shareholders to consider any resolution which may be placed at the meeting. The requisition lodged by the respondents 10 & 12 satisfies the relevant provisions of the Act, which compelled the Company to convene the board meeting on 24.07.2006. The fifth petitioner, despite service of the notice did not attend the board meeting held on 24.07.2006. The board of directors at the meeting held on 24.07.2006 decided to convene the extra ordinary general meeting of the shareholders and place the resolution as sought by the requisitionists. The fifth petitioner has been a director of the Company since 10.12.1998 and no one has vested right to continue as a director forever. The shareholders have every right to appoint the directors and their decision is final.
• The twelfth respondent is a resident of Mangalore. The Company decided to establish a show room at Mangalore for which the Company needed funds and a person to look after the show room at Mangalore. Consequently, the Company appointed the twelfth respondent as a director at the board meeting held on 04.07.2003 and allotted 50,000 shares. The twelfth respondent was again allotted on 18.06.2004 another 50,000 shares and the said resolution of the board dated 18.06.2004 was confirmed at the board meeting held on 16.07.2004, wherein among others, the fifth petitioner was present and thus aware of this development. The allotment of shares in favour of the twelfth respondent and his appointment as a director are supported by the Form No. 2 and Form No. 32 respectively. At this stage, the petitioners are estopped from challenging the allotment in favour of twelfth respondent and his appointment as a director of the Company.
• The acts complained of by the petitioners are not continuing. The conduct of the respondents is not burdensome and harsh. If a person is removed from directorship by the majority shareholders, the Company cannot be wound up on just and equitable grounds. No directorial complaints are amenable to the jurisdiction of the CLB. The present company application is liable to be dismissed in limine.
Shri A.K Mylsamy, learned Counsel in support of his legal submissions relied upon the following decisions:
• V.M. Rao v. Rajeswary Ramakrishnan (1987) Vol.61 CC 20 - to show that there must be continuous acts on the part of the majority shareholders, continuing upto the date of the pettion, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of company's affairs, and such oppression must involve atleast an element of lack of propriety or fair dealing to a member in the matter of his proprietary rights as a shareholder.
• Bagree Cereals (P) Ltd. v. H.P. Bagri (2001) Vol. 105 CC 465 to show that if a person has been removed from directorship by outvoting of the majority, and the case is not a case of quasi-partnership, then the company cannot be wound up on just and equitable grounds. Any termination of directorship or stopping of directorial remuneration of a single director, if remediable by a suit cannot ordinarily found a petition for just and equitable winding up.
• Life Insurance Corporation of India v. Escorts Ltd. AIR 1986 SC 1310 to show that Every shareholder of a company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extra ordinary general meeting in accordance with the provisions of the Companies Act. He cannot be restrained from calling a meeting and he is not bound to disclose the reasons for the resolutions proposed to be moved at the meeting. Section 173(2) of the Companies Act, 1956, does not require the shareholder requisitioning a meeting to disclose the reasons for the resolutions which he proposed to move at the meeting • S. Varadarajan v. Venkateswara Solvent Extractions (P) Ltd. 1994 Vol.80 CC - 693 to show that a shareholder possessing the requisite shareholding has the right to requisition an extra ordinary general meeting. Such a shareholder cannot be restrained by injunction from calling the meeting and he is not bound to disclose the reasons for the resolutions proposed at the meting. The reasons for the resolution are not subject to judicial review.
• Karedla Suryanarayana v. Sri Ramdass Motor Transport Ltd. (1999) 3 CLJ 422 to show that directorial complaints cannot generally be agitated, except in case of closely held companies.
• G. Govindaraj v. Venture Graphics (P) Ltd. (2005) 57 SCL 141 to show that the shareholders could not agitate directorial complaints on equitable grounds while seeking any remedy under Section 397 on account of exclusion of the shareholders from day to day affairs and management of the Company.
4. I have considered the arguments advanced on behalf of the parties The short issue for consideration is whether the Company shall be permitted to implement the resolution passed, if any, concerning the removal of the fifth petitioner from directorship, at the extra ordinary general meting held on 17.08.2006.
The principles enunciated in Life Insurance Corporation of India v. Escorts Ltd. and S. Varadarajan v. Venkateswara Solvent Extractions (P) Ltd. (supra) that every shareholder of a Company has the right, subject to statutorily prescribed procedural and numerical requirements, to call an extra ordinary general meeting in accordance with the provisions of the Act. Any meeting which has been properly requisitioned by the members under Section 169 shall not be interfered by the judicial forums are well settled. However, the applicability or otherwise of these principles must be considered in the context of the facts and circumstances of the present case. The petitioners are aggrieved on account of certain alleged acts of oppression and mismanagement, at the instance of the respondents, in the affairs of the Company. Among other things, the allotment of shares made on 04.07.2003 (50,000 shares) and 18.06.2004 (50,000 shares) in favour of the twelfth respondent and his appointment as a director at the board meeting held on 04.07.2003 are being challenged in the present proceedings. According to the petitioners, these impugned allotments and appointment, made in violation of the mandatory requirements of law are illegal and oppressive in nature and must therefore, be set aside by the CLB. The fifth petitioner, in spite of being a director was purportedly denied access to the statutory and other records, compelling the petitioners to seek the intervention of the CLB on 27.06.2006, upon which by an order dated 27.06.2006, it has been directed -that the fifth petitioner being a director of the Company, is at liberty to inspect the statutory and other records of the Company in the presence of the respondents or their authorised representatives at the registered office on 07.07.2006 at 11.00AM. There is no material to show whether the fifth petitioner has been permitted to take inspection of the statutory records of the Company. In the meanwhile, it is on record that the respondents 10 & 12 gave a written requisition on 17.07.2006 to the Chairman of the Company under Section 169 to convene an extra ordinary general meeting of the Company for the purpose of removing the fifth petitioner from the office as a director of the Company. The fifth petitioner has been admittedly a director since 10.12.1998. I do not see as of now any acts of omission or commission on record levelled against the fifth petitioner in the affairs of the Company, so as to remove him from the office of director. However, it has been vehemently contended that the accusations of the petitioners are highly belated and do not merit any consideration. It has to be borne in mind that the company petition has been filed in April 2006, challenging the allotment of shares in favour of the twelfth respondent and questioning his appointment as a director of the Company. Whereas, the twelfth respondent alongwith tenth respondent have given the requisition in July 2006 for convening the extra ordinary general meeting to remove the fifth petitioner from the office of director. This proximity of the requisition to the grievances made out in the company petition would indicate that the twelfth respondent has been impelled to seek the removal of fifth petitioner from directorship of the Company. In this background, the requisition given by the respondents 10 & 12 may be perfectly legal, yet the said act be oppressive of the petitioners, especially when in a petition under Sections 397/398, it is not the legality or illegality of an action has to be considered. However, probity and fairness towards the petitioners in the matter of their right as shareholders, with which the said decision is being taken must necessarily be considered. The validity of the allotment of impugned shares and the appointment of the twelfth respondent as a director cannot be gone into at this stage, and the entitlement of the twelfth respondent to join the requisition dated 14.07.2006 for convening the extra ordinary general meeting will ultimately depend upon the final out come of the company petition. It is, therefore, unfair to permit the Company to convene any extra ordinary general meeting as per the request of the requisitionists, the shareholding of one of whom is under serious dispute. The petitioners may or may not succeed in setting aside the impugned allotment in favour of the twelfth respondent but at the same time his joining the requisition to call for an extra ordinary general meeting at this stage cannot be permitted. It is observed that the petitioners' grievances do not relate only to directorial complaints and therefore, any remedy cannot be declined under the guise of termination of directorship of the fifth petitioner. Whether any directorial complaints are remediable or not, in the light of Karedla Suryanarayana v. Sri Ramdass Motor Transport Ltd. and G. Govindaraj v. Venture Graphics (P) Ltd. (supra) will be considered at the appropriate stage. Whether the acts complained of by the petitioners are continuous and harsh, which are essential requirements as laid down in V.M. Rao v.Rajeswary Ramakrishnan (supra), will not immediately arise for consideration. Similarly, the principles laid down in Bagree Cereals (P) Ltd. v. H.P. Baagri (supra) cannot be pressed into services, while considering the present grievances of the petitioners. In view of my foregoing conclusions, I, deem it fit, that the Company shall not implement the resolution, if any, passed at the extra ordinary general meeting held on 17.08.2006 removing the fifth petitioner of the office of director. Ordered accordingly and the order passed on 08.8.2006 is made absolute. The company application stands disposed of in these lines.