Company Law Board
Shri Ajit Singh Ahuja And Smt. Amrit Kaur ... vs Sapphire (India) Pvt. Ltd. And Ors. on 14 February, 2008
ORDER
Vimla Yadav, Member
1. In this order I am considering Company Petition No. 71 of 2004 filed by Shri Ajit Singh Ahuja and Smt. Amrit Kaur Ahuja under Sections 397 and 398 read with Sections 402, 403 & 406 of the Companies Act, 1956 (hereinafter referred to as the "Act") against Sapphire (India) Pvt. Ltd. and Ors. alleging certain acts of oppression and mismanagement. The allegations comprise illegal allotment of additional shares; unlawful removal of the majority shareholders from the management of R-1; illegal appointments of the respondents on the Board of Directors of the R-1; illegal shifting of the registered office of the R-1; manipulation and fabrication of accounts and siphoning off of funds of the R-1.
2. M/s Sapphire (India) Pvt. Ltd. (SIPL) Respondent No. 1 Company was incorporated on 2nd November 1982 having its registered office at A-1/B, DDA Flats, Munirka, New Delhi-110067. The authorised share capital of the company was Rs. 1 crore comprising one lakh shares of Rs. 100/- each. The Promoter Directors of the Respondent No. 1 Company were Mr. Kulbhushan Agarwal, Mr. R.K. Chopra and Mr. S.P. Agarwal. They obtained permission for manufacturing LPG Gas cylinders from Oil Companies and after getting a loan of about Rs. 73 lakhs from RIICO, constructed the factory at B-41, Bhiwadi Industrial Area, Bhiwadi, Rajasthan. They obtained license from ISI, Jaipur and started manufacturing LPG Gas Cylinders. As averred in the petition in September 1986, Mr. Kulbuhshan Agarwal and Mr. R.K. Chopra approached the petitioner No. 1 to become a director and help in running the factory. The petitioner No. 1 with the help of his friend Mr. Lakshmi Kant Jain contributed Rs. 12 lakhs as share capital to run the factory. Only Mr. R.K. Chopra of the old group of shareholders with a share capital of Rs. 1 lakh continued to remain with the company. In September 1986, the distribution of the new shareholding of Rs. 12 lacs was:- Mr. Laxmi Kant Jain- Rs. 3 lacs; Mr. Anil Jain (S/o Mr. L.K. Jain)- Rs. 3 lac; Mr. Ajit Singh Ahuja - Rs. 1.50 lac, Mrs. Amrit Kaur Ahuja - Rs. 1.50 lac; Ms. Suminder Kaur (D/o Mr. A.S. Ahuja) - Rs. 1.50 lac; and Mr. Manvinder Singh (H/o Ms. Suminder)- Rs. 1.50 lac. The entire share capital of Rs. 6 lakhs belonging to Mr Ajit Singh Ahuja and his family was paid by Mr. Ajit Singh Ahuja only. Mr. Ajit Singh Ahuja was made CMD of this closely held family company comprising father, mother, daughter, son-in-law and close family friend and Mr. Manvinder Singh and Mr. R.K. Chopra were Directors. In 1995-1996 the share holding position was:- Mr. Ajit Singh Ahuja - Rs. 8 lacs; Mrs. Amrit Kaur Ahuja, - Rs. 8 lac; Ms. Harmander Kaur (D/o Mr. A.S. Ahuja) - Rs. 2 lacs; Ms. Suminder Kaur (D/o Mr. AS. Ahuja)-Rs. 1.50 lacs Mr. Manvinder Singh (H/o Ms. Suminder) Rs. 1.50 lac; and Mr. R.K. Chopra-Rs. 1 lakh.
3. Dr. A.M. Singhvi, Senior Advocate for the petitioners pointed out that when the petitioner No. 1 became the CMD in 1986 the order position of Gas Cylinders substantially improved. During 1998-1999 and 1999-2000 the profit of the company was Rs. 12.75 lakhs and Rs. 85.25 lakhs respectively. But during the year 2001-02, the situation altogether changed, the oil companies floated tenders which unfortunately the Respondent company could not get and the work was stopped. Since the petitioner No. 1 was not keeping well Mr. R.K. Chopra and Mr. Manvinder Singh were looking after the factory. On 10th April, 2001 the factory chief engineer (Mr. R.K. Sinha) informed the petitioner No. 1 on telephone that the workers had not received salary for the month of March, 2001, which had become due on 7th April 2001. The factory accountant requested the petitioner No. 1 to make arrangement for the disbursal of workers salary (Rs. 4 lacs) and for the deposit of outstanding dues to sales tax department which the two directors Mr. R.K. Chopra and Mr. Manvinder Singh had failed to arrange. The petitioner No. 1 had to exert his personal influence with the Bank of Maharastra, he withdrew Rs. 9 lakhs and personally handed over the money to the accountant for the disbursal of salary. The Respondent company had financial arrangements with the Bank of Maharashtra and the cash credit limit facility upto Rs. 80 lacs. Mr. R.K. Chopra and Mr Manvinder Singh managed to obtain cheques from oil companies worth about Rs. 1 crore. Instead of depositing the cheques in the Bank of Maharashtra the Respondents deposited the cheques in SBI Bhiwadi and utilised the amount without supplying any details to the petitioners. The bank manager of Bank of Maharashtra, approached the petitioner No. 1, he being the main guarantor, in the month of May 2001 that there was no receipt of any payment although all orders had been completed by March 2001. The petitioner No. 1 made inquiries from the Oil companies and came to know that most of the payments had already been made and only some balance amounts were pending. It was pointed out that Bank of Maharashtra wrote letters to the Oil companies viz IOCL, BPCL and HPCL that in future they should make all the payments to SIPL by sending the cheques directly to Bank of Maharashtra. In June 2001, the petitioner No. 1 went personally to Mumbai to collect an amount of Rs. 74 lacs and directly deposited the amounts in the Bank of Maharashtra. To square up the balance loan the petitioners instructed the Bank to encash SIPL's F.D.R's so as to adjust the cash credit loan. Thereafter, as all bank loans had been repaid, petitioner asked the bank manager to credit the balance F.D.R.'s in their accounts to enable the Respondent company to repay the outstanding personal loans. The bank manager refused to do so as he had received a letter from Sh. R.K. Chorpa that there was a dispute between the directors and status quo was to be maintained. When the Petitioner No. 1 asked the bank manager to hand over the factory land ownership papers, he refused to hand over the same to the petitioner. The factory of Respondent Company was closed. The petitioner No. 1 asked Mr. R.K. Chopra and Mr. Manvinder Singh to give him the details of the utilisation of funds in SBI Biwadi. It was pointed out that they promised to do so but till the date of hearing of this matter the petitioners had not been shown the same. Since Respondent No. 2 (Mr. Manvinder Singh) is the petitioner's son-in-law he could not take any stern action against him in the interest of his daughter. Since one factory i.e. Bhiwadi Cylinders, situated at Bhiwadi was being run by Mr. R.K. Chopra (R-4) and Mr. Manvinder Singh (R-2), they promised to look after SEPL which was closed and the petitioners kept waiting for the next tender. During the year 2002 Mr. R.K. Chopra called up the petitioners several times promising to come and give details of accounts but he never turned up. Sometimes in June 2004, the petitioners came to know from the Bank of Maharashtra that the fresh loans had been granted to SJJPL. The petitioners were shocked and astonished as to how could this happen without their consent, as they were not only majority shareholder but one of them was CMD too. With great difficulty, the petitioner managed to get a copy of the partial record from the Registrar of Companies. Mr. R.K. Chopra and Mr. Manvinder Singh had conspired against the petitioners and had wrongfully removed them from the CMD and directorship of the company. The Respondents had wrongfully and illegally increased the share capital of the company allotting the extra new shares to themselves to make the petitioners minority shareholders.
4. Dr, Singhvi pointed out that the legally issued, subscribed and paid up capital of the Company is Rs. 22,00,000/- comprising of 22,000 equity shares of Rs. 100/-each fully paid up. The petitioners are the shareholders of 16000 equity shares of Rs. 100/-each which constitutes 73% (approx.). But due to illegal and unlawful allotment of 18500 equity shares of Rs. 100/- each petitioners have been reduced to 39.5% (approx.) and thereafter on 27.3.2003 further illegal allotment of 24500 shares has reduced their shareholding to 24%. The petitioner No. 1 had reposed complete faith and trust in his other family member/directors and left the control of the company due to illness. However, with great shock and pain to the petitioner No. 1 who and other family members were betrayed by small group of the company who conspired with the other members of the petitioner's family and conducted business in such a fashion which is a classic example of breach of faith and trust. The Respondents started manipulating and fabricating the records of its business purely with the express intention of ousting and removing petitioners and usurping control of the Respondent No. 1 Company. It was argued that Respondent No. 4 in connivance with Respondent No. 2 and other Respondents had completely mis-conducted the affairs of the company. The respondents had not only perpetrated fraud as regards the statutory records of the company, but had also resorted to manipulation and falsification of records and had without any authority of law and consent of shareholders of the company removed Chairman & Managing Director (the petitioner No. 1), arbitrarily, malafidely in an unlawful manner. It was contended that the respondents have ousted the petitioners to achieve their ulterior motive. Falsification of records, violation and noncompliance of law, unauthorized increase and allotment of capital constitute the acts of oppression and mismanagement. It was reiterated that Petitioner No. 1 is the chief architect of the Respondent Company after its original subscribers left the company when it was in bad shape and it is the petitioners who had set everything right and brought the company back on the track.
5. Dr. Singhvi pointed out that the petitioner No. 1 was holding the office of the managing director without any legal interruption since 1998 and had not tendered any resignation nor at any time had expressed his desire to leave. Petitioner No. 1 has not been subjected to any of the disqualification specified in Clause (g) to (k) of Sub-section (1) of Section 283 of the Companies Act. The inspection of the record in the Registrar of Companies office shockingly revealed his vacation of office by virtue of Section 283(1)(g) of the Companies Act. UPC notice dated 1.10.2001 addressed to petitioner No. 1 was shown to be posted from A-424 Defence Colony, New Delhi to A-424 Defence Colony, New Delhi which is the permanent residential address of petitioner No. 1 (CMD) and petitioner No. 2. This was also the address of the registered office of the Respondent Company till the same was unlawfully shifted to the residential address of Respondent No. 2. Respondents illegally convened and conducted meeting of the board of directors of the company on 12.10.2001, 20.11.2001, 12.1.2002, 22.1.2002 and 9.2.2002 and removed the petitioner No. 1 from the office of chairman-cum-managing director and petitioner No. 2 from the directorship of the company and appointed Respondent Nos. 3, 5, 6 & 7 as directors. Petitioners had no knowledge of the board meetings conducted on 12.10.2001, 20.11.2001, 12.1.2002, 22.1.2002 and 9.2.2002, they came to know of the same only when they took the inspection of record at Registrar of Companies' office and got the certified copy of Form No. 32. It was argued that the registered office of the company was illegally changed from Defence Colony to Munirka and the same constitutes oppression. It was shifted from the residence of petitioners to the residence of respondent No. 2 w.e.f 12.10.2001. The alleged notice regarding the change in registered office was never received by the petitioners. The shifting was made without the requisite procedure being followed. Form No. 18 which must be filed was filed much later on 17.06.2003 after delay of 652 days. The reason given for shifting of registered office to Munirka is that it will be closer to factory situated in Bhiwadi. Bhiwadi is 70-80 k.m. away in the State of Rajasthan and the difference between Defence Colony and Munirka would be only about 5 k.m. So at the most it is closer only by about 5 km, hence the respondents' contention is not tenable. The respondents alleged that the petitioners did not want registered office to continue at A-424 Defence Colony and that is why they had shifted. This goes against respondents' own earlier stated reason that shifting was due to proximity to factory.
6. It was argued that the notices shown to have been sent by UPC were managed in such a way that none of those ever reached the petitioners. Notice of meeting of 12.10.2001 for change in registered office was allegedly sent to petitioner on 1.10.2001, notice for meeting on 20.11.2001 on 12.11.2001, for meeting on 12.01.2001 on 3.1.2002 for meeting on 22.01.2002 on 12.1.2002 for meeting on 9.02.2002 on 1.2.2002. But the UPC stamp on the letter dated 12.01.2002 is of 12.11.2002 i.e. the letter is of January but the stamp is of November. This makes it clear that in an unholy haste, the respondents have got these UPCs stamped. All the letters have been shown as sent from Safdarjung post office. This is very suspicious since there is no reason why the respondents would go to Safdarjung to post it. When it is clearly mentioned that letters were being sent from registered office in Defence Colony, recipient was admittedly in Defence Colony as well, in fact at the same address as registered office i.e. from A-424 Defence Colony to A-424 Defence Colony. So the notices could easily have been hand delivered and in any case there was no need to go to Safdarjung. Even if assuming registered office was changed on 12.10.2002 to Munirka, the closest post office would be Munirka, R.K. Puram or JNU. There would be absolutely no need each time to go to Safdarjung to post the letters. It was argued that any sane person who receives notice of his removal from directorship will not be happy and celebrating his removal but would take immediate necessary action against the illegal act, he would not be absent from such meeting. The petitioners Counsel placed reliance on the decisions in the cases of Harcharan Singh (1981) 2 SCC 535 (para 7) wherein it has been held that presumption of service is rebuttable; LMS Ummu Saleema (1981) 3 SCC 317 (para 6) no conclusive presumption arises that letter posted through UPC was received; Dalmia Cement (2001) 6 SCC 463 (para 7) - presumption of service's rebuttable. My attention was drawn to the fact that though the illegal removal of the petitioners from directorship was shown w.e.f. 22.1.2002, however, Form No. 32 was not filed even after a delay of 465 days till 17.6.2003. It was argued that the respondents have removed the petitioners from the office of Chairman-cum -MD and also from the director of the company without taking recourse to Section 190 and Section 284 of the Companies Act.
7. It was pointed out that the respondents again conducted illegal board meeting and made allotment of 18500 equity shares of Rs. 100/- each to Mr. R.C. Chopra - 11000 shares and to Mr. Manvinder Singh 7500 shares. Inspection of the return dated 28.9.2002 (filed on 28.7.2003) revealed illegal allotment of fresh equity shares capital. However, surprisingly no form No. 2 was available on the record. My attention was drawn to the fact that in their pleadings the respondents have not mentioned the date of allotment of 18500 shares. Company had collected share application money of Rs. 57 lakhs including a large sum paid by the petitioner long back against which shares were not allotted for the reasons best known to the Respondents. Previous shares application money remained unallotted. In fact, the company should have legally allotted the shares against the earlier pending application money and then only fresh allotment could have been done subject to allotment on pro-rata basis and subject to the requisite compliances. Annual Return 2001-02 which reflects this was filed only on 18.7.2003 after a delay of 262 days.
8. Further, it was argued that the Second Allotment of 24500 shares exclusively in favour of respondents is also illegal, not valid and constitutes continuing Oppression by the Respondents. Admittedly, the second allotment of shares was alleged to have been done on 27.03.2003, this further reduced the share percentage of petitioners from 73% to 24%. This allotment is completely bogus because it has been stated by the respondents that 14000 shares were bought by M/s Triburg Investment Pvt. Ltd. (exclusively owned by Respondent Nos. 2 & 3) for fresh consideration. However, the certified Balance sheet of M/s Triburg Investment Pvt. Ltd. for the year 31.03.2003 with the ROC does not reflect any such investment in the shares of respondent company at all. In fact, the only thing that is recorded in balance sheet is loan/advance to Sapphire of Rs. 4 lakhs. Even if argued that this is with relation to shares, the consideration for former would be 14 lakhs and not 4 lakhs. In rebuttal the respondents stated that "Accounting treatment not responsibility of respondent company" which is an absurd contention because as per the Companies Act it is mandatory to follow the mercantile system, how can the respondent company say that it has received 14 lakhs from M/s Triburg Investment Pvt. Ltd. while the audited Balance sheet of M/s Triburg show that it has not paid any such amount, it is a case of forgery and manipulation of accounts. In addition, the statutory Annual Secretarial Compliance Report of respondent company for the year 2003 (a certified copy issued by ROC Delhi) clearly shows that, in fact, no shares were issued during the financial year 2003 at all. For their contentions the petitioners placed reliance on the cases reported at (1995) 84 Comp Cas. 838 (CLB)- Unfair methods of gaining control like alloting shares to self and manipulating records equals oppression; (1997) 97 Comp Cas 561 (CLB-PB) - Reducing of majority shareholder to minority by issuing new shares and alloting the same en bloc to minority and then subsequently removing the majority holder from directorship constitutes oppression hence set aside.
9. The respondents did not give any notice to the company's shareholders of the AGM alleged to have been held on 28.9.2002 in violation of the basic rights of the shareholders of the company and also violation of Sections 166, 170, 171, etc. The respondents also filed the annual return for the said AGM with the Registrar of Companies which is gross violation of the provisions of Section 162 of the Companies Act. Further, no notices regarding statutory AGM in 2003 and 2004 have been received by the petitioners. It was pointed out that till the date of filing of this petition the Respondents who had usurped the powers of the company illegally by way of contravening the provisions of the Companies Act, 1956 had not so far even served the notices of AGM of the company which was due by 30.9.2003 and 30.9.2004 which is continuing state of mismanagement of the affairs of the company and oppression of the majority shareholders of the company and is prejudicial to the interest of the common shareholders, creditors and public at large. The respondents had tried their tactics of removing the petitioner mainly to deceive investors and shareholders of the company. The entire affairs of the company were managed by a close coterie without any transparency and no information is given to the company's shareholders. It was pointed out that when the Company's unsecured creditors and depositors approached the Respondents for the refund of their deposits, the respondents flatly refused receipt of such money though it is accepted and reflected in the books of accounts of the company. The depositors were replied that they should approach the petitioner No. 1 for refund of their deposits which, in fact, is legally lying with the company. It was contended that the Respondent No. 2, aided and abetted by Respondent No. 4 and other respondents, conceived the idea to oust the petitioners arbitrarily, malafidely, in blatant violation of the law as enunciated in the Companies Act, 1956 as part of their nefarious design to take over the Respondent No. 1 Company. No notice of any Board Meeting or intimation in writing was given to the petitioners. It was contended that their action is, therefore, unlawful, illegal and malafide and liable to be set aside. On the one hand, respondents have arbitrarily and malafidely reduced the petitioners into minority by illegally allotting shares in their names and on the other hand the Respondents are maliciously and capriciously not alloting shares to the members for which the amount of Rs. 57,00,000 is lying with the company as share application money since considerable long time. Drawing my attention to the manipulations in the records it was pointed out that balance sheet of 2001 shows only Rs. 11,00,000 instead of Rs. 57 lakhs. The balance sheet for the year ended 31st March 2001 was not adopted in any AGMs for not being authenticated in terms of Section 215(1) of the Act. It was prayed that it be declared as illegal. It was reiterated that the Respondent No. 2 and his accomplices have surreptitiously usurped the powers from petitioners since the year 2001. Respondent No. 2 with the help of other respondents especially Respondent No. 4 have siphoned off the funds of the company and have pumped the same where they are the common directors viz. in M/s Bhiwadi Cylinders Pvt. Ltd. In addition, the respondents have taken Gantry Crane and other machinery of respondent company worth Rs. 1.5 Crore and transferred and installed the same in their own competing concern viz. M/s Bhiwadi Cylinder Pvt. Ltd. My attention was drawn to the picture showing that the Gantry Crane is in Bhiwadi factory. Therefore, it was prayed that the Bank account of the company be allowed to be operated jointly with the signatures of petitioner No. 1. It was argued that it is crystal clear from the Balance sheet dated 31.3.2001 filed with the Registrar of Companies, Delhi that there is grave manipulation of accounts. The shareholders' and the creditors' accounts have been defrauded and deliberate wrong entries have been shown which justify that there is manipulation of entries in the books of accounts and fabrication of records. My attention was drawn to some instances of manipulation of accounts appearing prima-facie in unsecured loan details in Annexure B to the balance sheet dated 31.3.2001 and under the head share application money contending that (a) Sh. Ajit Singh Ahuja (petitioner No. 1) has not received Rs. 5 lakh as being fraudulently shown as drawn against his name; (b) Smt. Amrit Kaur Ahuja (petitioner No. 2) has not received Rs. 19 lakhs as being fraudulently shown as drawn against her name; (c) Smt. Harmander Kaur(daughter of petitioners) has not received Rs. 6 lakhs as being fraudulently shown drawn against her name; and(d) share application money of Rs. 57 lakhs has been reduced to Rs. 11 lakhs by certain manipulative accounting entries. It was contended that the balance sheet dated 31.3.2001 which shows that the petitioner No. 1 has received Rs. 5 lakhs, petitioner No. 2 Rs. 19 lakhs and Smt. Harmander Kaur (daughter of petitioner) Rs. 6 lakhs is totally false and incorrect. The petitioners have received no such amounts. The wilful omission along with other slipshod handling of affairs, it was contended, give a clear cut picture of the arbitrary, oppressive and prejudicial manner in which the affairs of the company are being conducted. Respondents have siphoned off funds for the growth and well being of M/s Bhiwadi Cylinders Pvt. Ltd. Both the Respondent Nos. 2 & 4 are also directors of M/s Bhiwadi Cylinders Pvt. Ltd. which is also manufacturing and repairing Cylinders and is also located in the same town viz Bhiwadi like the Respondent company (SIPL). Statutory records have not properly been mentioned. There have been numerous instances of procedural defaults. Notices of the AGM are not being properly served upon the petitioners and other shareholders in accordance with the provisions of the Act which itself amounts to mismanagement and oppression under Sections 397 and 398 of the Act. It was argued that the petitioners have justifiably lost confidence in the continuance of the Respondents in the management and affairs of the company, as directors and shareholders, whose conduct is not only oppressive but lacks probity and is an unreasonable conduct, not expected from the member directors.
10. Shri U.K. Chaudhary Counsel for the respondents pointed out that Respondent No. 2 (Manvinder Singh), who is a qualified Engineer, left a lucrative and secured career of the Indian Railways and joined the Respondent No. 1 Company, he contributed towards the share capital of the company out of his own resources in the year 1986, he brought Rs. 1,50,000/- towards the share capital of company. He was appointed as director of the company due to his capital contribution and due to the fact of his professional qualification and engineering background. He always enjoyed the working majority in the company and actively involved himself in the day to day business of company and otherwise also the petitioners never restricted the management rights of the Respondents as being the equal partner in the business. As regards the numbers of equity shares it was contended that the shares were allotted to the Respondent Nos. 2 and 4 by the Respondent No. 1 to fund its financial requirements as the company was facing the financial hardship and 18,500 equity shares were allotted by the Respondent No. 1 company after due compliance of provisions contained in the Act and provisions contained under the Memorandum and Articles of the Association of the company. To finance its future growth plans and to implement the new project of disposable cylinders and to increase its net worth for the export markets, the Respondent No. 1 Company required further funds. And apart from the allotment of aforesaid 18,500 Numbers of equity shares, on 27/03/2003 the Respondent No. 1 company had further allotted the 24,500 numbers of equity shares after complying with the provisions of the Act and the provisions contained under the Memorandum and Articles of Association of the company. The Counsel for the respondents argued that for the purpose of developing disposable cylinders the company requires the new plant and machinery due to which the fresh capital investment was required in the company, and the company invested Rs. 60.37 lakhs in the plant and machinery during the year 2002-2003 to 2004-2005. For increasing the net worth of the company and further for infusing the fresh funds in company the Respondent No. 1 allotted the fresh shares in the company firstly by way of allotment of fresh shares of 18,500 at Rs. 100/- each totaling Rs. 18,50,000/- in the year 2001-2002, the 18500 numbers of shares were allotted by way of reducing the unsecured loan of company and converting the same in the equity capital so that net worth of company could be increased and company could take the loans at the better terms from the banks; and further on 27/03/2003 the company allotted the 24500 numbers of the equity shares at Rs. 100/- each totaling Rs. 24,50,000/-. It was contended that fresh share capital of Rs. 24,50,000/- was brought in the company by the Respondents: 14 lakhs by M/s Triburg Investment and Engineers Pvt. Ltd.; Rs. 7.5 lakhs by Sh. R. Chopra; Rs. 3 lakhs by Sh. Manvinder Singh. Thus the total fresh investment in the company is Rs. 43,00,000/- plus Rs. 65,00,000/- totaling Rs. 1,08,00,000/-, which is in addition to the capital contribution and loan contribution in the company of the Respondents which clearly shows that the Respondents had invested hugely in company and with their constant efforts re-started the operations of company. The petitioners were always well aware about the fact of further allotment of 24,500 numbers of the equity shares by the Respondent No. 1 Company as it was clearly shown in the Audited Balance Sheet and Profit & Loss Account of the company for the year 2002-2003 and 2003-2004. It was pointed out that the Petitioners have purposefully neither mentioned nor did impugn the further allotment of 24,500 Nos. of shares allotted by the Respondent No. 1 Company. On 27.03.2003 24500 shares were allotted to M/s. Triburg Investment and Engineers Pvt. Ltd. (14000); Shri Rajneesh Chopra (7500); Shri Manvinder Singh (3000). The issued, subscribed and paid up Share Capital of the Respondent No. 1 company was increased from Rs. 40,50,000/- to Rs. 65,00,000/- consisting of 65,000 Numbers of fully paid up equity shares of Rs. 100/- each.
11. It was further argued that, Sh R.K. Chopra, Respondent No. 4 died on 03.03.2004 and on his death the aforesaid 11,500 numbers of equity shares standing in the name of Lt. Sh R.K. Chopra were transmitted in favour of his son Sh Rajneesh Chopra i.e the Respondent No. 6 on 05.04.2004.
12. It was pointed out that the Petitioners only at the time of filing the Rejoinder have attached the fake, forged and fabricated copy of the Memorandum and Articles of Association of company which purposefully and with mala-fide intentions was neither annexed with nor averred in the Petition. Inspection of documents at ROC of Delhi revealed that Form 23 annexed by the Petitioners with their rejoinder, had fraudulently shown that the EGM of company was held on 31.10.2000 at A-24, Defence Colony, New Delhi at 11:00 A.M, whereas no such EGM was ever held and the Petitioners by fabricating the EGM notice filed the Form 23 with the RoC, Delhi on 30.05.2001 allegedly showing alteration in Clause 15, 20 and 29 of the Articles of Association of Company, and said Form 23 also contains fabricated and forged notice of alleged EGM and fabricated Certified true copy of Resolution on the letter head of company under the signatures of Petitioner No. 1. The resolution filed with ROC, Delhi bears address of registered office of Respondent No. 1 company as Y-83, Hauz Khas, New Delhi 110016, whereas the registered office of the Respondent No. 1 company was changed from Hauz Khas to Defence Colony way back in 1983, it was contended that forgery of Petitioners is further obvious from the fact that the Secretarial Compliance Report which was filed with ROC in respect of financial year ending on 31.03.2001 contains no reporting of the EGM held on 31.10.2000, which clearly shows that the Petitioners have themselves forged the Form No. 23, notice of EGM.
13. It was pointed out that the Respondents also came to know from the inspection of records that the Petitioner No. 1 also appointed Mrs. Harminder Kaur as the Director in Respondent No. 1 company w.e.f 12.03.2001 and Form No. 32 in this respect was also filed under signatures of Petitioner No. 1, and whereas the Petitioners never disclosed this fact in their Petition, Mrs Harminder Kaur has been appointed without following any mandatory procedure provided under The Companies Act for appointment of Director, as such appointment of Ms Harminder Kaur is void.
14. It was contended that the Petitioners have filed forged and fabricated documents to support their false, vexatious, frivolous Petition, and deliberately suppressed these facts from the Respondents and as well as from Hon'ble Bench, and the manner in which said documents were revealed before the tribunal clearly shows that the Petitioners have not approached the Bench with clean hands and deserve no relief as prayed in their Petition.
15. It was pointed out by the Counsel for the respondents that the Memorandum and Articles of Association vide Clause 8 to 13 under heading "Transfer of shares" and more particularly under Clause 10 provides that "a member intending to sell any share shall give notice of his intention to the Directors who shall offer such shares to all the members in proportion to their respective holdings in the company and may there upon find one or more members willing to purchase the same. This shall be done within two months of the receipt of such notice. The price payable for the purchase of shares (unless otherwise agreed upon by both the parties) shall be their fair value which shall be determined by the company's auditors and this decision of the Auditors shall be binding on the seller as well as on the purchaser". Transfer of shares of exiting Aggarwals, Jain and Pasricha group of shareholder exclusively in favor of the Petitioners is void and illegal and is nullity which would not attract any of the principle of estoppel or acquiescence. The Petitioners i.e. Ahuja Group of Shareholders effected the transfer of 9000 shares of the Aggarwal group of shareholders and 9000 shares of Jain's Group of shareholders in their favor despite of the fact that shares surrendered by leaving shareholders were supposed to be transferred between the existing shareholders in such a manner so that original shareholding ratio between the shareholders shall not be disturbed. However, the Petitioners illegally and without paying any consideration increased their shareholding from minority shareholder to majority shareholder and thus illegally and without due process of law acquired the majority shareholding in the Respondent No. 1 company. Their claim of shareholding by the Petitioners in the present petition is false and frivolous and they have not approached the Hon'ble Tribunal with clean hands. However, the Ahuja Group without paying any consideration in respect of these shares showed the transfer of said 9000 shares in their favor, and accordingly increased their shareholding from 14% to 41% and now to 82%, whereas as per the proportionate transfer of shares of Aggarwal and Jain Group of shareholding they are only entitled for 43% of the shareholding of the Respondent No. 1 company.
16. Further, it was argued that without prejudice to the lawful allotment of 18,500 and 24,500 shares in the Respondent No. 1 Company to the Respondents, by any stretch of imagination the Ahuja Group of shareholders i.e. Petitioners can not demand majority shareholding in Respondent No. 1 Company. In any eventuality even if 18500 and 24500 shares allotted in company are allotted on the proportionate basis on the basis of their original shareholding, the Ahuja Group of shareholders are only entitled for 43% of shareholding in the Respondent No. 1 company.
17. The Counsel for the respondents argued that in the year 2001-2002 the company was left with no business, and starting and hoping no revival of the Respondent Company the Petitioners became totally indifferent towards the company from the year 2000 onwards and virtually abandoned the company. The Balance Sheet for the year 2000-2001, 2001-2002, 2002-2003 and 2003-2004 were finalized and signed by the Respondent Nos. 2, 4 and 6 only. It was further contended that the Respondents were always aware about the fact that annual accounts of the Respondent No. 1 company for the respective years were finalized and board meeting were held on periodic intervals as per the requirement of Companies Act and despite of this they willfully failed to attend the meeting of board of directors and neither paid any heed to the consistent notices sent by the Respondents, which evidently establishes the fact that the Petition of the Petitioners is barred by delay and latches and the Petitioners willfully acquiesced to all actions of the Respondents and they have no cause of action against the Respondents.
18. Further, it was contended by the Counsel for the respondents that hoping no revival of business the Petitioner even attempted to sell the Respondent No. 1 Company without any authority and the said ill attempt was prevented by the Respondents. The profitability of company from 1999-2000 to 2005-2006 was 1999-2000 - 8525037.25; 2000-2001-4931332.00; 2001-2002-5950654.73; 2002-2003 -93358.47; 2003-2004 -963938.42 2004-2005 - Rs. 4,82,999 net Profit; 2005-2006 - Rs. 4,72,000 net profit. The Petitioners were keeping close eyes on company's operation and when they found that the company would be re-positioned as the profit making company again, they filed the present petition and this is being used by the Petitioners as an engine to sell off their shareholding to the Respondent by way of exerting the pressure on the Respondent and thus is gross abuse of the process of law. It was contended that the allegations regarding the mismanagement are generalized and lack in particularity. Reliance was placed on Ramesh Bhajanlal Thakur v. Sea Side Hotel P. Ltd. [2000] 100 Comp Cas 117 (CLB-PB) wherein referring to the settled principle of law in proceedings under Sections 397 and 398 of the Companies Act, 1956, that the relief sought should be to put an end to the acts of oppression/mismanagement and not for any oblique purpose, it was held by the Company Law Board dismissing the petition, that the petitioner was not entitled to relief because : (a) in the absence of any evidence of existence of a will, the only question to be examined was whether transmission of the shares held by the deceased was in accordance with the provisions of the articles of association : the shares had been transmitted to the legal heirs and in accordance with Article 44 of the articles of association which authorised the board to dispense with probate, etc., and this action of the board could not be considered an act of oppression or mismanagement; (b) other than making an allegation of siphoning off of funds, no particulars had been given; (c) the very fact that the petitioner had targeted the second respondent leaving alone the managing director of the company, who was his own brother and represented his group, showed that the petition was not a bona fide one.
19. It was contended that there is no manipulation in the UPCs. The company is a close family company, rather the petitioners in their Rejoinder have stated that -"...as both are close relatives and there is no need of keeping UPC as they could communicate otherwise also as in the past". This is a self defeating argument and the petitioners have swallowed back their entire argument of so called managed UPCs. There is no law that merely the UPCs posted from one post office shall vitiate their credibility, the petitioners failed to bring any evidence on record that said UPCs are actually not served upon the Petitioners. The contention that the said UPCs are managed is merely a conjecture of the Petitioners, a mere allegation and can not be relied upon, the fact remains that they willfully didn't reply to the UPC letters and consequently due to operation of law as per Section 283(1)(g) they ceased to be directors of the company. The increase in share capital is already evidenced by the purchase of Plant and Machinery in the company, thus the same can not be considered merely for the purpose of disturbing the share holding pattern of company, the funds were bonafidely required by the company, and the petitioners having abandoned the company were not willing to invest even a single penny in the company. It was pointed out that the Petitioner wished to sell off the company which was prevented by the Respondents. Thus even otherwise they are not interested in running the company and reinstating their shareholding will be prejudicial to the interest of the company. It was contended that the registered office of company was changed as per the due process of law since the petitioners themselves objected to keeping the registered office of company at their residence.
20. The Counsel for the respondents further contended that the petition is false and frivolous and deserves to be dismissed. However, the respondents in the larger interest of the company without prejudice alternatively suggested that the petitioners should sell their shares to the Respondents. Reliance was placed on judgments in D. Ramakrishna Rao v. LRR Hatcheries P. Ltd. [2000] 99 Comp Cas 327 (CLB). Bajarang Prasad Jalan and Anr. v. Raigarh Jute & Textile Mills Ltd. [2001] 104 Comp Cas 555 (Cal) to substantiate their contentions that the petitioners had not come with clean hands and that the initial allotment of shares was in violation of the Articles of Association of the company. The Respondent No. 2 being the engineering graduate and the Respondent No. 6 Mr. Rajneesh Chopra being MBA are proper persons to manage the business as compared to the Petitioners who are old and as per their own version are ill and their activities are restricted due to medical advice. Thus in facts of the case, the respondents shall buy out the petitioners at the valuation to be done by the statutory auditor of the company as per Articles of Association of the company. It was argued that differences between the petitioners and the respondents are such that it is not possible them to continue together. Even assuming that if the allotment of shares is invalid, the petitioners would gain majority control and which would lead to further litigation between the parties and both the parties would be at liberty to do it again which would pave the way for further litigation affecting the interests of the company. It was contended that in a Section 397/398 petition, the interest of the company is paramount and the same can be protected only by directing one of the groups to go out of the company by selling their shares to the other group. There were lots of proposals and counter proposals and the Respondents also made the offer to buy out the Petitioners but it could not materialize. It was further argued that the only way by which the parting of ways between the groups could be effected is that the petitioners' group should sell their shares to the respondents. The respondents offered a sum of Rs. 1.25 Crore as consolidated amount vide their letter dated 08.02.2005. Since the price offered by the Respondents is not acceptable to the petitioners, it is appropriate that the shares of the company should be valued by an independent valuer as on date of Petition so that there could be no dispute regarding the price payable by the Respondents to the Petitioners. Article 10 of the Articles of Association of the company provides for determination of fair value by the auditors of the company in case of transfer of shares. The provisions of the same article should be applied in valuation of shares.
21. Alternatively, it was argued by the Counsel for the respondents that realignment of share holding pattern of company as per the original sharing ratio of 1:3:3 between the Chopra group, Manvinder group and Ajit Singh Ahuja Group be done. It was argued that as per the case of Petitioners every allotment in company shall be in proportion of shareholding of existing shareholders of the company, in such a case only 18500 and 24500 number of the equity shares could not be subjected to the proportionate allotment, however in such a case to arrive at actual proportion of shareholding in the company in which shares have to be allotted at the first instance the entire shareholding of company shall be reinstated at the actual shareholding of the company as applicable at the time when the Petitioners and Respondents joined their hand for running the company, thereafter the proportionate allotment of 18500 and 24500 number of the equity shares be done. It was alleged that the petitioners have violated and disturbed the original shareholding pattern of the company, the original shareholding pattern was of 1:3:3 between the Chopra group, Manvinder group and Ajit Singh Ahuja Group. Since inception of company there are three instances when the shares of outgoing members of company were transferred but shares were not transferred in proportion of shareholding as applicable at the time of transfer of shares and in case of re-appropriation of 18500 and 24500 shares between the shareholders firstly the shareholding pattern of company shall be rectified and allotted in proportion of original shareholding of the respondents and petitioners and accordingly shares of 18500 and 24500 shares shall be appropriated in rectified shareholding pattern of the company. It was argued that "the persons who seek equity must do equity" if the petitioners are asking for allotment of shares on proportionate basis then only the allotment of 18500 and 24500 could not be subject to the proportionate allotment, in such an event equity demands that each and every allotment in the company shall be on proportionate basis; the company is a family company and in the nature of glorified partnership, thus the original understanding between the shareholders to run the company could not be altered; the petitioners were repeatedly called upon to produce the original share certificates, original transfer deeds, offer letters, renunciation letters on record to show the due compliance of law at the time of allotment of shares, which they failed to produce; at the time of transfer of shares in favor of Ahuja Group (Petitioners) the mandatory procedure for the transfer of shares as provided in the Articles of Association was not followed; the restoration of the shareholding pattern in the original proportion will be beneficial to the company and is in the larger interest of company, it will instill the democratic set up in the management of company and each of the group will have say in the management of affairs of the company without prejudicing the rights of any parties, any other adjudication will lead to endless litigation and will not be in the interest of the company.
22. I have considered the pleadings, the documents annexed therewith and the arguments and the cases relied upon by the parties. I find that the respondents have failed to refute the contentions made by the petitioners. The allegations contained in the petition remain uncontroverted. The respondents' preliminary objections and counter allegations are untenable. The petitioners' case is that of oppression and mismanagement. The petitioners have contended that they have been oppressed by reducing their shareholding of 73% to 39.5 % and thereafter to 24% illegally and it is a continuous oppression; further they have been oppressed by their illegal removal from the management of the respondent company and illegal appointment of other directors on the board; illegal change in the registered office of the company; manipulation and fabrication of accounts; illegal reduction in share application money; siphoning off of funds and shifting of plant and machinery to the respondents' concerns. The respondents have contended that the petition is barred by delay and latches; there is misjoinder of parties; the petitioners have not come with clean hands; the petitioners being unwell have abandoned the company; the initial allotment of shares at the time of their joining the respondent company was not fair and in accordance with the Articles of Association, hence if subsequent allotments have to be proportionate the initial allotments also have to be made proportionate; there is a deadlock, the petitioners should be asked to go out of the company on receipt of valuation to be done by the Chartered Accountant of the company.
23. It is a case of a closely held family company. Father-in-law and mother-in-law are pitted against their son-in-law and family friends. There have been allegations and counter allegations. The respondents' preliminary objection that the petition is barred by delay and latches is not tenable. The allegations regarding illegal allotment of shares have been made within a reasonable time considering the delicate relationship between the parties. The illegal allotments were discovered on inspection of the ROC's record in June/July 2003 and the petition was filed on October 2004. Even otherwise illegal allotment of shares is an act of continuous oppression. As regards the respondents' allegation of unclean hands of the petitioners, the allegation of unfair and illegal allotment of 18000 shares of outgoing Agarwals and Jains to themselves and their family members in 1986 on joining the respondent company not being in accordance with the Articles of Association , the respondents have tried to agitate old matters, as old as in the year 1986 to which the respondents have themselves acquiesced. The respondents are estopped from raising the same now to contend that if subsequent allotments of 18500 shares (for which even the date of allotment is not shown) and the allotment of 24500 shares on 27.3.2003 have to be made on proportionate basis, the earlier allotments made in September 1986 and 1995-96 have also to be reallocated. Such a contention has been made now by the respondents despite their furnishing such statements with the Registrar of Companies to which they themselves are also signatories. There is no way to accept such a contention. It is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd. 44 CC 390 the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "...the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands". In the present petition it is the respondents who have not come with clean hands. This petition deserves to be allowed on this ground alone. As regards misjoinder of parties, it is true that R-4 is no more available being dead, but the petitioners have already impleaded R-6 to whom R-4's shares stand transmitted. The respondents' contention is not tenable, necessary and proper party having already been impleaded.
24. In a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. In the present case all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioners have rightly invoked the provisions of these sections.
25. I find that the directors of the company have breached the fiduciary duty and have acted against the interest of the R-1 trying to dupe each other and trying to grab the maximum benefits out of the transactions of the R-1. Equity prohibits a trustee from making any profit by his management, directly or indirectly. It is objectionable to use such power simply or solely for the benefit of directors or merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. Directors are required to act on behalf of a company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of a company with utmost good faith, utmost care and skill and due diligence and in the interest of the company they represent. They have a duty to make full and honest disclosure to the shareholders regarding all important matters relating to the company. The conduct of the respondents has been burdensome, harsh and wrongful. Besides, the affairs of the company have been mismanaged as pointed out above.
26. The respondents have not been able to meet the allegations of illegal allotment of 18500 shares and 24500 shares reducing the shareholding of the petitioners from 73% to 39.5% and thereafter to 24%. The respondents have failed to show the date of allotment of 18500 shares besides the proper purpose of increase in the share capital. The petitioners' allegations that the annual return filed in September 2002 showing increase of Rs. 18.50 lakhs is merely a book entry, no Form No. 2 has been filed are tenable. The respondents have themselves stated that "in case of allotment no fresh infusion of funds is necessary and that mere transfer can be done". This statement of the respondents negatives their own argument of "the dire need of funds". Despite the petitioners share application money being available, the respondents' allotted 18500 shares to themselves to the exclusion of the petitioners. However, Annual Return for 2001-2002 which reflects this was filed only on 18.7.2003 after a delay of 262 days. Further, on 27.3.2003 further allotment of 24500 shares is also to the exclusion of the petitioners and the petitioners' allegation of further illegally reducing their shareholding to 24% being oppressive are also tenable. The petitioners' contention that the balance sheet as on 31.3.2003 showing an increase in share capital of Rs. 43 lakhs [18.50 + 24.50] is a fabricated one also appears to be true. No such balance sheet as on 31.3.2003 is available on the record of the Registrar of Companies. Out of the increase of Rs. 24.51 share capital Rs. 14 lakhs has been shown as the contribution by Triburg Investment & Engineers Pvt. Ltd. The petitioners' contention that the contribution shown by Triburg Investment & Engineers Pvt. Ltd. is not reflected in their Balance Sheet has not been refuted by the respondents. Further, compliance certificate for the year 31.3.2003 filed by the R-1 with the Registrar of Companies states "no increase in share capital".
27. As regards illegal removal of the petitioners from the management of the company, the respondents have failed to refute the allegations and substantiate their contentions that the petitioners vacated office by operation of law as per provisions of Section 283(1)(g) of the Act. The petitioners allegation that the said UPCs were manipulated and managed ones and, in fact, the UPCs were sent in such a way that none of these ever reached the petitioners are tenable. UPCs were shown to have been sent from the residence of the petitioners to the same residence from Safdarjung Post Office whereas the registered office of the R-1, as per the respondents' own pleadings was Munirka. My attention was drawn to a letter dated 12.01.2002 which bears the UPC stamp dated 12.11.2002. The respondents have maintained stony silence about this fact. The petitioners' argument that if they had received notice of meeting regarding their removal from directorship, it is very unusual that they would not attend such a meeting damaging their own interest is tenable. Even Form No. 32 was filed on 17.6.2003 after a delay of 465 days.
28. Further, the respondents have not been able to justify the shifting of the registered office of the company from Defence Colony to Munirka. Their argument that it is nearer to Bhiwadi is of no avail as the difference of distance from Defence Colony and from Munirka to Bhiwadi is only of 5 k.m. and the shifting has been done without following the due procedure as prescribed for shifting of registered office. The petitioners' contentions of UPCs for such notices being managed ones have already been held as tenable. Even Form No. 18 was filed with the Registrar of Companies on 17.6.2003 after a delay of 652 days.
29. Since the petitioners did not receive any notice for the meetings said to have been held for appointment of respondent Nos. 3, 5, 6 & 7 as directors, the appointments are held be illegal having been made at the back of majority shareholders without following the provisions of the Act and the Articles of Association.
30. Further, the petitioners' contentions regarding manipulation of R-1's records are also found to be true. The respondents have shown that Rs. 40 lakhs shares Application money out of Rs. 57 lakhs as reflected in the balance sheet as on 31.3.2001 was repaid to the share Applicants. This is incorrect. The petitioners produced the Chartered Accountant's certificates in this regard declaring that no such share Application money has been received by them. Respondents maintained silence in response. Even on asking they failed to produce the Bankers' certificate that the share application money had been repaid. Allegations regarding transferring of the R-1 company's machinery viz gantry crane costing approximately Rs. 65 lakhs to the Respondents' Company namely Bhiwadi Cylinders Pvt. Ltd. without consideration have also not been refuted.
31. In view of the foregoing acts of oppression and mismanagement, asking the petitioners to go out of the company, as per the emphatic alternative arguments of the respondents contending that there is a deadlock and any other adjudication will lead to litigation is nothing but a reflection on the conduct of the respondents. Granting such a prayer would in any case amount to further oppression of the oppressed.
32. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company and, therefore, the petition deserves to be allowed. Relief to be granted depends on the fact of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations and fraud. To do substantial justice between the parties, I order as follows:
I. The issue and allotment of 18500 shares and 24500 shares made by the respondents is hereby declared as null and void, status quo ante is hereby restored. All resolutions passed and all statements filed in this regard are hereby declared as null and void.
II. Since I have held that vacation of office of the directors under Section 283(1)(g) can not be sustained, I declare that the petitioners shall continue to be directors of the company.
III. The appointments of Respondent Nos. 3, 5, 6 & 7 as directors are hereby declared as null and void.
IV. R-2 is hereby directed to reinstall all plant and machinery shifted from R-1's premises to his own concern forthwith.
V. In the next EOGM to be held within six weeks of receipt of this order, a neutral Chartered Accountant be appointed by the Board of the R-1 to ascertain the correct Annual Accounts of the R-1 for the period 1.4.2001 to 31.3.2007 and revised Annual Statement be filed with the Registrar of Companies.
With the above directions, I allow this petition vacating all interim orders. All CAs stand disposed off. No order as to cost.