Company Law Board
Shri Badri Nath Galhotra And Shri Kapil ... vs Aanaam Private Limited And Ors. on 25 September, 2006
Equivalent citations: [2007]135COMPCAS534(CLB), [2007]76SCL241(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioners, collectively holding 1/3rd of the share capital of M/s Aanaam Private Limited (the company) have filed this petition alleging oppression and mismanagement in the affairs of the company. The company owns a hotel in Amritsar and as such its main business is to run and manage the hotel. The main allegation is that the 1st petitioner has been removed as the MD and that the 2nd petitioner has also been removed as the General Manger of the Hotel.
2. Shri Choudhary, appearing for the petitioners submitted: The 1st petitioner is a founder promoter of the company and till the year 2000, he along with his brothers and other family members held 58% shares in the company. In the year 2000, the petitioners' group acquired the shares held by other family members and thus held the entire 58%.. There are 3 groups in the company, namely, Galhotra group (the petitioners), Verma group (the second respondent) and Khajinder Singh group (the.third respondent). The latter two groups held the balance 42% of the equity shares at 21% each. Even though the petitioners group was in majority with 58% shares after acquisition of shares from other family members, with the view to give equal representation on the board for all the three groups, in a Board meeting on 6.8.2001, the 1st petitioner proposed that the quorum for the board meetings should be 3 directors, one from each group and the Board resolved to accept the said suggestion. After the petitioners acquired the shares, in 2001, it was agreed and decided by the three groups that for the smooth running of the hotel, the shareholding should be equalized and the hotel should be run in the nature of a quasi partnership among the three groups. Accordingly, the 1st petitioner voluntarily transferred nearly 25% of the shares held by his group to other two groups by which presently each group holds nearly 1/3rd shares in the company. These transfers of shares to the other two groups by the petitioner group were approved in the Board meeting held on 13.8.2001. In the board meeting held on 20.8.2001, on the suggestion of the lst petitioner, it was also decided and resolved that the post of MD would be by rotation and each group would nominate the MD for a period of two years, and the bank accounts were resolved to be operated j ointly by any of the two. All the decisions were taken unanimously. On the basis of these decisions, Shri Khajinder Singh was appointed as the MD on that day for a period of 2 years. When he completed his term as MD on 14.8.2003 and on his resignation, Shri Rakesh Verma was appointed as MD for a period of two years in a Board meeting held on 14.8.2003 specifically providing that the appointment shall be for a period of two years. During the period of the MD ship of Shri Rakeh Varma, the 1st petitioner noticed mismanagement in the nature of siphoning of funds in different ways and when the petitioner took up the matter with the respondents, no satisfactory explanation was forth coming. In the mean while, Shri Raksh Verma resigned from the post of MD after over staying for one month beyond the tenure of 2 years, and the 1st petitioner was appointed as MD on 7.9.2005 and relevant form No. 32 was filed on the same day. This was done in terms of the Board resolution dated 20.8.2001. After taking over as MD, the 1st petitioner noticed various acts of financial mismanagement in the company. Various correspondences were exchanged between him and other two directors. Since no clarifications/explanations were forth coining on his complaints, the petitioners also caused a legal notice to be issued to the directors on 1.10.2005. An emergency Board meeting was convened by the 3rd respondent on 14.10.2005 to discuss the legalnotice. and a lot of words were exchanged due to which no business could be transacted. Both the side filed police complaints against each other and this was also widely published in newspapers. Thereafter, the petitioners have been denied access to the hotel premises and the records of the company as the 3rd respondent had taken possession of all the records. The 1st petitioner received a notice signed by the 3rd respondent as MD for a Board meeting on 31.10.2005. The petitioner sought for postponement of the meeting as he was not available on 31.10.2005. It had come to the knowledge of the petitioners that in the Board meeting on 14.10.2005, the 1st petitioner had been removed as the MD and the second petitioner had also been removed as the GM. No business could have been transacted in the meeting as due to exchange of words, the petitioners had left the meeting and in view of the fact that, without the participation of the 1st petitioner there would have been no quorum, even if the other directors had passed resolutions to remove the 1st petitioner as MD and the second petitioner as GM, the same would be invalid. With the removal of the 2nd petitioner as the general manager and the lst petitioner as MD, the respondents have high jacked the management of the company completely in exclusion of the petitioners holding 1/3rd shares in the company. Having removed the 1st petitioner as MD, with the view to further consolidate their control over the company, the respondents have also caused a special notice dated 31.10.2005 to be issued by their group under Section 190 of the Act for the removal of the 1st petitioner as a director in the AGM. After the respondents took control of the company, there has been a large scale siphoning of funds. Substantial portion of the revenue is collected in cash not only with a view to siphon of the funds but also to avoid payment of VAT. In addition, the relatives of the respondents are treated as guests of the hotel without recovering any charges. Various acts of mismanagement and siphoning of funds of the company have been elaborated in paragraph 53 of the petition. Thus, by their various acts, the respondents have, in breach of the principles of quasi partnership, acted in an oppressive manner against the petitioners holding 1/3rd shares in the company and have also indulged in gross mismanagement of the affairs of the company. Therefore, an investigation into the affairs of the company in terms of Sections 235/237 should be ordered, and the respondents should be restrained from removing the 1st petitioner as a director. They should also be restrained from obstructing the 1st petitioner from, discharging his functions as the MD and the resolution allegedly passed on 14.10.2005 removing the 1st petitioner as the MD should be declared as null and void In the alternative, since the petitioners had transferred their shares on the understanding of joint management and that the respondents have acted in breach of the said understanding, the petitioners' shareholdings should be restored to 58% by canceling the transfer of shares by the petitioners' group to the other two groups.
3. Shri Manmohan, Sr. Advocate for the respondents submitted: The petitioners are guilty of forum shopping. They have already filed a civil suit in the joint names of the company seeking more or less similar reliefs prior in time to the filing of the present petition. The foundation of the petition is that the company is in the nature of a quasi partnership. This principle can be applied only if there had been a prior partnership, equality in the shareholding, restriction on transfer of shares and deadlock etc. In the present case, none of these exists. Normally, promoters are named as first directors in the Articles. However, in Article 31 of the Articles of Association, the 1st petitioner's name is not found clearly indicating that he was not one of the promoters of the company. The company was not incorporated by the petitioner as alleged by him but by two outside groups who are not parties to the present proceedings. In 1979, the petitioners' group consisting of 3 brothers became shareholders of the company. Verma group entered the company in 1980 with 21% shares and Singh group became shareholders in 1982 with 21% shares. Thus, when the hotel business was commenced in the year 1982, these two groups held 42% while the 1st petitioner by himself held only 17% shares. There were some disputes among the brothers in the petitioners' group and by way of a settlement in 2001, with the financial assistance given by Varma and Singh groups, the 1st petitioner acquired the shares held by other family members, and thus, came to hold 58% shares. Because Varma and Singh groups funded the purchase of these shares by the petitioner's group, they transferred 25% shares to the Varma and Singh groups by which each group came to hold 1/3rd shares in the company. Petitioners' prayer in the petition that the transfer of shares approved in the meeting held on 13.8.2001 should be declared as null and void cannot be granted not only as being time barred but also because it was a voluntary transfer. The petitioners' reliance on two Board meetings held on 6.8.2001 and 13.8.2001 to claim quasi partnership is unfounded. On 6.8.2001, after the acquisition of shares by the petitioners' group, they held 58% shares as against the other two groups holding only 42% shares. Therefore to protect the interest of minority shareholders, the Board decided to amend the Articles to provide that the quorum for Board meetings would be three represented by one director from each group. The Articles are yet to be amended. In terms of the present Article 40, all decsions are to be taken by majority votes in the Board meetings and therefore the petitioners are bound by the majority decision. This being the case, the question of quasi partnership does not arise. Even the bank accounts have been approved to be operated jointly by two directors and not by every director to indicate that the company is not a quasi partnership. No doubt, in the Board meeting on 13.8.2001, the 1st petitioner proposed that the post of MD would be held by each group by rotation but the same was not approved and left to be decided later. Thus, there was never an understanding or legitimate expectation for the petitioner to be in management. In Kilpest case 1996 10 SCC 69the Supreme Court has held that quasi partnership principles cannot be applied in a company. Further, the petitioners have not established that the company is liable to be wound up on just and equitable grounds, the establishment of which is a must in terms of Hanuman Bagree Cereals case AIR 2001 SC 1413.
4. The learned Counsel further submitted: By his letter dated 18.6.2005 (Annexure P-7), the petitioner sought for various clarifications regarding the accounts of the company and also other matters, and this letter was forwarded by the company to the General Manager- the 2nd petitioner- for his comments as the matters complained of were under the purview and control of General Manager. However, the 2nd petitioner disowned his responsibility. Even then, the Chartered Accountant of the company, by a letter dated 12.7.2005 (Annexure P-11), informed the 1st petitioner that the books of accounts of the company were being checked on a day to day basis and all the discrepancies noticed were immediately being rectified. The Managing Director also, by a letter dated 11.7.2005, clarified all the points raised in the letter of the petitioner dated 18.6.2005. Thereafter, also the petitioner continued to write to the company seeking for various clarifications. Finally, the 1st petitioner caused a legal notice dated 1.10.2005 once again making similar allegations against the respondents. The company convened a Board meeting on 14.10.2005 to discuss the issues raised by the petitioner and the 1st petitioner attended this meeting, and the majority of the board decided to remove him. as MD and appoint the 3rd respondent as the MD. As far as the proposal to remove the 1st petitioner as a director is concerned, in law, the majority shareholders have the right to remove a director and since the 1st petitioner has acted against the interests of the company. The allegation of the petitioners that the funds of the company are being siphoned of due to which the profitability has come down is not correct. Because of competition from many new hotels that have come up in Amritsar, the company has to renovate the hotel incurring substantial expenses. It is to the knowledge of the petitioners that there is an internal auditor in the company who has been monitoring the expenses on a day to day basis. It is on record that the company has earned a profit of Rs. 1.6 crores on a paid up capital of Rs. 50 lacs evidencing good management by the respondents. The petitioners have alleged that for rooms booked in the hotel, charges are not being collected. Extending hospitality to people who matter is unavoidable in hotel industry and as such the petitioners cannot allege malpractice or mismanagement in this regard. In sur rejoinder, the respondents have furnished a list of persons having references of the petitioners' group in organizing parties in the hotel and have alleged that the petitioners either have not collected the dues of about 9.25 lakhs from the parties or after collecting, have siphoned of the same.
5. The learned Counsel further submitted that directorial complaints cannot be agitated in a petition under Sections 397/398. When a director is removed in accordance with the Articles, he cannot allege oppression. If at all the 1st petitioner has any grievance about his removal, he has to agitate the same in a civil suit. As already explained, his prayer of canceling the transfers approved in a board meeting held on 13.8.2001 cannot be granted not only being time barred but also for the reason that all the transferees have not been impleaded.
6. In rejoinder, Shri Chaudhary submitted: In so far as the civil suit is concerned, as undertaken by him and recorded in the order of this Bench on 30.11.2005, the civil suit has been withdrawn therefore, the question of parallel proceedings does not arise. In the present case, it is not a question qf minority or majority but a question of equality. Admittedly, each group holds 1/3rd shares in the company and the company is in the nature of quasi partnership. It is true that the petitioners acquired shares from their family members but respondents never funded the acquisition. Out of goodwill and with a view to ensure equality, the petitioners transferred such number of their shares to each of the respondents' group so that there would be equality in the shareholding among the three groups. The petitioners' bonafide and goodwill gesture has been taken advantage of by the respondents. It is evident from the minutes of the board meeting held on 6.8.2001 that it was the 1st petitioner who proposed change in the quorum for board meeting with a view to give equal representation for the protection of the other two groups even though the petitioners held 58% shares on that date. By this, equal protection was given to each partner so that two do not join against the third. In the same way, the 2nd petitioner was appointed as the General Manager of the company. In the board meeting held on 13.8.2001, it was the 1st petitioner who suggested that there should be a rotation of MD every two years and the Board approved the suggestion and accordingly on that basis, the 3rd respondent was appointed as MD for two years. Therefore, to contend that it was only a suggestion and not approved is not correct. In the same meeting, the 1st petitioner was appointed as the Joint MD. The very fact that after expiry of two years, the 2nd respondent was appointed as MD on 14.8.2003 and that further after expiry of two years, the 1st petitioner was appointed as MD on 7.9.2005 would indicate that the rotation of MD had been formalized and agreed to by all the three groups. Therefore, the 1st petitioner has the legitimate expectation of continuing as MD for a period of two years and as such cannot be removed. When the 1st petitioner became the MD and on finding out that there had been financial mismanagement and siphoning of funds during the earlier years, he only sought for clarifications which were never provided. Because of the inaction by the respondents, the 1st petitioner was forced to issue a legal notice. Therefore, the action of the respondents in removing the 1st petitioner is a gross act of oppression against the petitioners' group and as such he should be restored as MD and the other reliefs sought for in the petition should be granted. In terms of Articles 13 and 14, there are restrictions on transfer of shares and also provision for pre-emptive rights indicating clearly that quasi partnership principle has been adopted in the Articles also. This Board has held in Naresh Trehan v. Hymatic Agro Equipments Pvt. Ltd. 1997 CC 561 and also in Deepak G. Mehta v. Anupar Chemicals (India) Pvt. Ltd. 1998 CC 575 that in a closely held companies, the removal of a director could be considered to be an act of oppression. In Jagjit Singh Chawla v. Tirath Ram Ahuja Ltd. CP 57 of 1999, this Board has held that in a closely held company, if a shareholder has been in management for a long time, he has the legitimate expectation of continued participation in the management. In Ebrahmi v. Westbourne Galleries Ltd. 1972 2 AER 492, it has been held that using the majority power as provided in the Articles, if a director in a company in the nature of a quasi partnership, is removed, it would amount to oppression.
7. I have considered the pleadings and arguments. It is unfortunate that parties who had worked together and nurtured the company for over 20 years should have fallen out on flimsy grounds. The petitioners have invoked the principles of quasi partnership to claim the right to participate in the management. The learned Counsel for the respondents, relying the decision in Kilpest case has contended that in a company, the question of applying the principles of quasi partnership does not arise. It is to be noted that in that case it has only been held that the said principle cannot be easily applied and it has not been held that the principle can never be applied. In Sangram Sinh P. Gaekwad v. Shanta Devi P. Gaekwad , the Supreme Court has held that the decision in Kilpest cannot be said to be an authority for the proposition that for no purpose whatsoever can the principles of quasi partnership be applied to an incorporated company. The real character of a company, for the purpose of judging the dealings between the parties and the transactions which are impugned may assume significance and in such an event, the principles of quasi partnership in a given case may be invoked. Thus, it is evident whether the quasi partnership principles can be applied or not would depend on the facts of each case. It is an admitted position that in the present case, there are only three groups in teh company holding equal percentage of shares. Whether the petitioners' group transferred a part of its shares to the other two groups voluntarily so as to maintain equality in the shareholding or as contended by the respondents, the shares were transferred against the financial assistance given by them to the 1st petitioner to acquire the shares from his other family members is, difficult to decide in the absence of more particulars, but the admitted fact is that the transfer resulted in all the three groups having equal percentage of shares in the company. It is also an admitted fact that after the three groups became equal shareholders in 2001, all the three groups were associated in the management either as MD or Joint MD. If a company has equal shareholders and if all of them participate in the management, the concept of quasi partnership can always be presumed. It is not necessary that to treat a company as a quasi partnership, there should be a deadlock, prior partnership etc as contended by the learned Counsel for the respondents and the existence of these facts would only strengthen the claim of quasi partnership. Such a partnership need not be restricted only to promoters and even if somebody joins the company with the clear understanding of equal shareholding and equal participation in the management, the said principles can be applied. Therefore, the petitioners have rightly invoked the principles of quasi partnership in the present petition. Even if the said principle is not applicable, yet, in given circumstances, allegations relating to denial of participation in the management/removal from directorship can be enquired into in a petition under Sections 397/398. The learned Counsel for the respondents also submitted relying on Bagree Cerealscase that directorial complaints cannot be agitated in a petition under Sections 397/398 and can be agitated only in a suit. In a recent judgment of the Supreme Court in Kamal Kumar Datta v. Ruby General Hospital 35 2006 7 SCALE the Court has held the removal of a director could be both oppressive in terms of Section 397 and since it would also result in material change in the management, it could attract the provisions of Section 398 also.
8. The main allegation of the petitioners is that the 1st petitioner has been removed as the MD in spite of the board having resolved to appoint MDs by rotation. The contention of the respondents is that the Board did not resolve so but left it to be considered later. The board resolution dated 20.8.2001 reads "Shri Badrinath, director of the co. proposed that we should now appoint managing director of the co. after the resignation of Shri Jagannath which has duly been accepted by the board. He further proposed that MD be appointed for a period of 2 years from each group by rotation. He proposed the name of Shri Khajinder Singh as MD of the co. to which all the directors present agreed unanimously. The board further agreed that such appointment of MD will be for a period of two years after which new MD will be appointed from Shri R.P. Verma group and Badrinath group as may be mutually agreed upon at that time and Shri Khajinder Singh will be stepping down from the post of MD after a period of two years. In this connection, the following resolution was passed " Resolved unanimously that S. Khajinder Singh is being and hereby appointed as MD of the co. with immediate effect for a period of two years from the date hereof". From this, it is abundantly evident, that the Board had actually resolved to appoint an MD from each group for a period for two years, and the resolution was immediately acted upon also by appointing Shri Khajinder Singh as MD for two years term. The appointment of Shri Rakesh Verma as MD in the board meeting held on 14.8.2003 after completion of 2 years term by Shri Singh and further appointment of the 1st petitioner as MD on 7.9.2005, after completion of two years term by Shri Verma would confirm that the board had actually implemented the decision already taken. Therefore, the contention of the respondents that in the board meeting held on 30.1.2001, only a proposal was considered but no decision was taken is not correct. Breach of a decision collectively taken by all the partners in a quasi partnership and which has been acted upon also could definitely be termed as an act of oppression. The contention of the respondents that the Articles of the company have not been amended in line with the board decision is of no avail. Having taken benefit of the said resolution by which both the respondents' group have enjoyed the position of MDship for a period of two years each, it is highly inequitable that having appointed the 1st petitioner as the MD in terms of the said same resolution, to remove the 1st petitioner as MD. It is to be noted that even prior to his appointment as the MD, the 1st petitioner had alleged mismanagement in the affairs of the company by the respondents, and notwithstanding that action of the 1st petitioner, he was appointed as the MD. It is to be noted that the 1st petitioner was the first among the three groups to enter the company in 1979 while the other two entered the company only later. His removal as MD, which I have already held as oppressive was also not in accordance with the resolution relating to quorum for board meetings. It is on record that in the board meeting held on 6.8.2005, the board had decided that the quorum for board meeting would be three directors i.e. the 1st petitioner, the 2nd and 3rd respondents. In the board meeting held on 14.10.2005, according to the 1st petitioner, he had left that meeting on account of exchange of words and therefore if the decision to remove him had been taken after the 1st petitioner left the meeting, there would have been no quorum. Even though the respondents have taken the stand that in terms of Article 40, the decisions in the board meeting are to be decided by majority, yet, Article 38 stipulates that the quorum for a board meeting shall be three directors and the board had decided that the three shall be the 1st petitioner, the 2nd and 3rd respondents and therefore unless this quorum is present, even a majority decision cannot be taken. In Ebrahmi v. Westbourne Galleries Ltd. 1972 2 AER 492, it has been held that using the majority power as provided in the Articles, if a director in a company in the nature of a quasi partnership, is removed, it would amount to oppression. It is to be noted that the petitioners' group entered the company in 1979 while the other two groups entered the company only later. In Thirthram Ahuja's case (supra) the petitioners therein held only 12% shares and when they were completely excluded from the management after having, been associated in the management for a long time, this Board held that their exclusion was an act of oppression. Some of the cases wherein this Board has taken a similar view are Gurnam Singh v. Polymer Papers Ltd. 123 CC 486, Arati Dutta v. Unit Construction Ltd. 124 CC 584. Therefore, the removal of the 1st petitioner as MD besides being highly oppressive in terms of Section 397, is also invalid. Removal of a director that too of the MD, as held by the Supreme Court in Ruby General Hospital case, would attract the provisions of Section 398 also.
9. Both the petitioners and the respondents have alleged that the other group is either entertaining its friends and relations free of cost or that collections have not been deposited in the company. It is to be noted that company is a closely held company and out of necessity to maintain cordial relationship with those connected with the management, the provision of hospitality is unavoidable and it is quite possible that this practice must have been going for a long. Therefore the allegations and counter allegations in this regard do not merit giving any finding. I am of the view that 1st petitioner by writing the letters seeking for explanations from the respondents on the issue, need not have blown up the issue out of proportion resulting in the long time friendship becoming sour ultimately forcing the respondents to remove the petitioner not only as the MD but as a director.
10. Accordingly, I dispose of the petition directing that the 1st petitioner shall take over as MD with immediate effect and he will continue to function as such till he completes two years in office including the period from 7.9.2005 to 14.10.2005 He will also continue as a director and the board resolutions on 6.8.2005 and 20.8.2005 relating to quorum and appointment of MD by rotations shall remain in force notwithstanding anything contrary contained in the Articles. In so far as the removal of the 2nd petitioner as GM is concerned, I leave it to the board to decide this issue. In view of this direction restoring the 1st petitioner as the MD, I have not considered the alternate prayer for restoration of the shareholdings of the petitioners to 58% by canceling the transfer to the respondents. I only hope and trust that the parties will forgive and forget their differences and manage the affairs as hereto in an atmosphere of cordiality, which would in the interests of the company and of the shareholders.
11. With the above directions, the petition is disposed of.