Karedla Suryanarayana And Ors. vs Ramadas Motor Transport Limited And ... on 18 June, 1999

[Cites 21, Cited by 6]

Company Law Board

Karedla Suryanarayana And Ors. vs Ramadas Motor Transport Limited And ... on 18 June, 1999

Equivalent citations: [1999]98COMPCAS518(CLB)

ORDER

S. Balasubramanian, Chairman

1. In this petition filed under Section 397/398 and related sections of the Companies Act, 1956 ("the Act"), by the petitioners holding about 10.65 per cent. in M/s. Ramadas Motor Transport Ltd. (the company), the main allegations of oppression and mismanagement in the affairs of the company relate to closure of parcel offices, sale of lorries and vehicles, removal of petitioner No. 9 as a director of the company, increase in share capital by way of rights issue, diversion of funds to companies managed by former employees, fabrication of board minutes and diversion of funds for personal gains by the respondents. On the basis of these allegations, the petitioners have sought for various reliefs, inter alia, including supersession of the board, declaration that respondents Nos. 2 and 3 are not fit to hold the post of directors of the company, appointment of two representative directors from the petitioners' group, ordering these two respondents to compensate the company for the money misappropriated by them, declaration that the removal of the petitioner as a director is null and void, and cancellation of the rights issue made in 1994, etc.

2. This petition has a long history. Originally, the petitioners filed a petition on February 24, 1994, numbered as C. P. No. 7 of 1994. On filing of that petition, they sought certain interim reliefs relating to the rights issue made by the company and we gave certain directions in regard to the same. Since the respondents raised an objection on the maintainability of the petition in terms of Section 399 of the Act on the ground that the petition suffered from absence of valid consent, we gave the petitioners the liberty to file an amended petition and, accordingly, the present petition, viz., C. P. No. 15 of 1994, was filed on April 11, 1994. On April 21, 1994, we gave a direction that all decisions for disposal of trucks or closure of parcel offices or opening of agency offices would be taken only in board meetings. The petitioners, thereafter, filed an application, C. A. No. 83 of 1995, seeking permission to file evidence by way of affidavits and also for summoning of certain witnesses. The matter relating to filing of evidence by way of affidavits was heard oh July 21, 1995, and after considering the objections raised by counsel for the respondents on the admissibility of filing such affidavits, by an order dated July 27, 1995, we declined to grant permission and permitted the petitioners to lead evidence by personal appearance if they so desired. On October 16, 1995, petitioner No. 9 (hereinafter referred to as the petitioner) gave oral evidence and was cross-examined on October 17, 1995, and October 18, 1995, which was inconclusive. Since the parties were from Andhra Pradesh, we decided to continue the further cross-examination either at Madras or at Hyderabad on dates to be notified. In the meanwhile, on February 15, 1996, the petitioner filed C. A. No. 65 of 1996 seeking various reliefs, inter alia, including appointment of an administrator. In a hearing held on July 30, 1996, counsel for the petitioner sought liberty to amend this application which was granted with the direction that the application would be heard along with the main petition and in view of the petitioner's submission that he wanted to lead evidence by certain other persons, directions were also issued for filing of a list of such witnesses by August 16, 1996. Thereafter, the petitioners filed C. A. No. 67 of 1997 bringing out allegations relating to the accounts of the company with a prayer that to the extent of what has been stated in this application should be treated as amendment to C. A. No. 65 of 1996. In the hearing on December 4, 1996, the petitioners sought for adjournment and accordingly the matter was posted to May-21, 1997. In the hearing on May 23, 1997, we gave directions to the petitioner to file a list of witnesses, which he did on September 3, 1997.

3. Since by that time, the petitioners had filed another petition in respect of a connected company, namely, Gopal Automotive Limited (C. P. No. 12 of 1997), we suggested to the parties that they should try to settle all disputes not only in respect of these two companies but also in respect of four other group companies in which the petitioners had some interest. The suggestion was that the shares held by the petitioners in all these companies should be purchased by the respondents at a value to be determined by an independent chartered accountant. The same suggestion was reiterated by us in the hearing on September 29, 1997. However, no progress could be made towards this end as the respondents were not agreeable for the same even though the petitioner was agreeable.

4. C. A. No. 65 of 1996 was heard on November 28, 1997, and we passed a detailed order on this application on December 18, 1997, rejecting the prayer of the petitioner for appointment of an administrator since the prayer emanated from subsequent events after filing of the petition. The petition was posted for hearing in April, 1998. In the meanwhile, since the petitioners had filed a list of witnesses to be examined and since the witnesses were in Andhra Pradesh, it was decided to record the evidence at Chennai, on June 9, 1998. At the request of counsel for the petitioners, summons to the witnesses were handed over to him for service. On this day, none of the witnesses could be produced by the petitioners for oral evidence and accordingly the recording of the evidence was closed. In the hearing held on September 8, 1998, it was reported by counsel for the petitioners that the first petitioner expired in July, 1998, and as such his legal heirs would have to be substituted in his place and for this purpose, some more time may be allowed. (However, later it was informed that the efforts to have them substituted did not materialise). Accordingly, the hearing was adjourned to December, 1998, and, thereafter, the petition was heard on a few days and was concluded on March 22, 1999.

5. After the hearing was concluded, both counsel have given us their written submissions which also have been taken into account as a part of their arguments. To avoid repetition, we have detailed their arguments allegationwise and have given our findings thereafter on each of the allegations.

6. Shri Choudhary, advocate for the petitioners, initiating his arguments, submitted that the affairs of the company are being carried on in a manner prejudicial to the interest of the company as well as the shareholders by respondents Nos. 2 and 3. Of the nine directors in the company, there are only two directors who are not related to the second respondent and as such the board is practically controlled by the second respondent. He further submitted that in the year 1978, a petition under Section 397/398 of the Act was filed in the Andhra Pradesh High Court by some other shareholders including the fourth and fifth petitioners in the present proceedings. This petition was withdrawn at the instance of the petitioner who had then joined the board on the specific understanding with the second respondent that the affairs of the company would be conducted in accordance with law henceforth. Since the ninth petitioner was elected as a Member of Parliament in 1984, he was not in a position to attend the board meetings regularly. Since certain shareholders complained to the petitioner that there had been instances of misappropriation of the company's funds by the second respondent, as a director, the petitioner sought for clarifications on this issue from the second respondent which he failed to provide. Accordingly, some of the shareholders including the petitioner raised the issue of misappropriation of funds in the annual general meeting held in September, 1993. Being aggrieved by this act of the petitioner, he was removed as a director of the company in an extraordinary general meeting held on January 21, 1994. The petitioner is pursuing the matter in the interest of all the shareholders of the company.

7. Shri Raghavan, senior advocate appearing for the respondents, submitted that this is a motivated petition on account of the strained relationship between the petitioner, being the son-in-law of the second respondent, and the second respondent. All the allegations made in the petition which are vague and false have to be viewed in this context. He submitted that the earlier proceedings in 1978, were dismissed on the merits and it is false on the part of the petitioner that due to his efforts, the petition was withdrawn and that there was a compromise. He also submitted that at any point of time the company had three to four independent directors other than family members and as such it is wrong to say that respondents Nos. 2 and 3 are conducting the affairs of the company by themselves. He also submitted that the petitioner is a habitual litigant and he does not enjoy the support of even the family shareholders. According to him, even though the first petitioner has expired, the petitioner has not been able to join the former's legal heirs as they do not support the petitioner. The second petitioner attended the last annual general meeting held on September 30, 1998, and voted in favour of all resolutions. The third petitioner withdrew from the petition on November 8, 1995. Petitioners Nos. 4 and 5 have never taken any interest in the affairs of the company and they have not been attending by annual general meeting. It is only the family of the petitioner consisting of petitioners Nos. 6, 7 and 8 being the daughter, wife and daughter of the petitioner actually pursue the petition. In other words, he submitted that a family dispute is being fought in the guise of a company petition. He submitted that the present management enjoys commanding support from the shareholders as is evident from unanimous passing of all resolutions proposed by the management in the general meetings. The company has been consistently declaring 18 per cent. dividend and the share's worth is about Rs. 1,100 as against the face value of Rs. 10. That is the reason why all the shareholders other than those constituting about 4 per cent. whose whereabouts are not known, have accepted the rights issue made by the company. The allegations in the petition would reveal that all allegations are directed towards respondents Nos. 2 and 3 and not the other directors, clearly indicating that it is the personal animosity between the petitioner and these respondents which is the motive for this petition.

8. Closure of parcel offices :

Shri Choudhary : Between July and August, 1992, the second and third respondents, without the knowledge or sanction of the board of directors closed 57 parcel offices. The motive behind such closure is to release lorries connected to these parcel offices and dispose of these lorries in a way to benefit themselves at the cost of the company. These respondents have fabricated the minutes of the board meeting held on September 7, 1992, to show as if the closure of the parcel offices was delegated to the second respondent (annexure P10). However, this resolution was not referred to by the company in its letter at annexure P8 when some of the shareholders questioned the authority to close the parcel offices vide their letter at annexure P7. Further, this resolution was not referred to in response to the letter of the petitioner at annexure P9. If this resolution had actually been passed, then, there was no need for inclusion of the item relating to closure of parcel offices in the notice issued for board meeting on March 3, 1993 (annexure R1). This notice at annexure R1 was issued on February 20, 1993. On the same day, another notice was purportedly issued for another board meeting convened on February 27, 1993. There is nothing to indicate in the second notice as to whether it was preponement of the meeting to be held on March 3, 1993, or an additional meeting. Since most of the items of the agenda for both the meetings were similar, there must have been a motive for issuing the two notices. In the first petition which was later withdrawn, the petitioners had averred that in the board meeting held on March 3, 1993, the petitioner had questioned the closure of parcel offices and, therefore, to rebut this averment, it has been shown as if no meeting was held on March 3, 1993, other than the one on February 27, 1993. Annexure R2 which is purportedly a letter from the petitioner seeking for leave of absence for the meeting to be held on. February 22, 1993, is a fabricated one. Even though the petitioner admits his signature on this letter, the letter as such was not signed by him as he normally left signed papers with the company due to his pre-occupation otherwise. In fact, the petitioner never received the notice for convening the board meeting on February 27, 1993. Therefore, the minutes dated February 27, 1993, are fabricated in which the action of the managing director to close the parcel offices was alleged to have been ratified and that the proceedings of the meeting actually held on March 3, 1993, in which the petitioner questioned the rationale of closure of parcel offices have not been recorded in the minutes book.

9. Sri Raghavan : Opening and closing of parcel offices was based on volume of traffic generated. Totally all the parcel offices put together generate only between 20 and 30 per cent. of the turnover of the company. Since several of the offices were non-productive, the management decided to close such offices, the board was apprised of the action of the management in the meeting held on August 7, 1992, which was attended by the petitioner and when these minutes were approved in the meeting held on September 29, 1992, the petitioner was present in that meeting also. It has always been the managing director who has been deciding these matters as per the delegation of powers in the board meeting on August 7, 1992, subject to the ratification later by the board. There had been two sets of closure of parcel offices and in two different board meetings, such closures were ratified--one in the board meeting held on August 7, 1992, when the board ratified the closure of 57 parcel offices and the other in the board meeting held on February 27, 1993, in which the board approved closure of 14 offices. There was no board meeting on March 3, 1993. May be there was an omission in the notice convening the board meeting on February 27, 1993, to indicate that the meeting convened on March 3, 1993, had been either cancelled or preponed, but the petitioner cannot take advantage of this omission especially when he was a party to the decision to confirm the minutes of the meeting held on February 27, 1993, in the subsequent meeting. The contention of Shri Choudhary that the motive behind the closure of the parcel offices was to release lorries touching these offices to enable the second respondent to dispose of them with a view to gain monetary benefit is baseless. This is absolutely false inasmuch as there has been a large addition to the fleet of lorries in spite of closure of unremunerative parcel offices and as such there is no basis for this allegation since the closure of parcel offices is purely a business decision which cannot be questioned in a petition under Section 397/398. Our findings : The allegation relating to the closure of the parcel offices is two fold. One is that without the approval of the board, the second respondent closed the parcel offices and that there have been manipulations in the recording of minutes of the board meeting in which the decision to close the parcel offices was ratified. The second is that the purpose of closing the parcel offices was to release the lorries with a view to make money out of the proceeds of the sale of these lorries. There are minutes of a board meeting on August 7, 1992, which according to the company was attended by the petitioner, indicating that approval was given for closure of parcel offices and for delegating the authority to decide closure of parcel offices to the managing director, viz., the second respondent. Even though the minutes do not reflect the details or the number of offices, according to the counsel for company, closure of 57 parcel offices was ratified. We find that the last of the 57 offices was closed on August 3, 1998, and the board meeting was reportedly held on August 7, 1992. The petitioner doubts the veracity of this resolution on the ground that this resolution was not referred to in the letter written by the company at annexure P8. We are not in a position to doubt the genuineness of the resolution inasmuch as in the next board meeting held on September 29, 1992, which the petitioner attended, the minutes of the meeting held on August 7, 1992, were reportedly confirmed. The petitioner has not controverted this fact. The petitioner has further alleged that there was no board meeting on February 27, 1993, and that there was a meeting only on March 3, 1993. The company admits to have issued two notices on February 20, 1993, convening meetings on February 27, 1993, and on March 3, 1993. The agenda for both the meetings was the same except that the agenda for the meeting on February 27, 1993, contained two additional items. If, in fact the meeting scheduled on February 27, 1993, had taken place, then, there was no need for the meeting on March 3, 1993, as all the agenda items included for that meeting would have been considered on February 27, 1993, itself. There is no averment in the rejoinder in which the petitioner has questioned the meeting on February 27, 1993, that he had not received any notice for that meeting. As a matter of fact, according to the company, he had sought leave of absence by the letter at annexure R2. The signature of the petitioner on this letter is not disputed except that according to the petitioner, the company has filled in certain signed papers left with the company. From a perusal of the letter, considering the manner in which the letter has been typed and signed, we are not in a position to come to a conclusion that the same is a fabricated one. Further, we also note that the minutes for the meeting held on February 27, 1993, have been subsequently confirmed in a meeting on June 9, 1993, which was attended by the petitioner. The grievance of the petitioner is that he objected to the closure of 57 parcel offices in the meeting held on March 3, 1993, and asked for full details of the same which the company did not provide and to avoid recording his dissent, the minutes have been fabricated to show that there was a meeting only on February 27, 1993. He has also questioned the rationale of discussing the closure of the offices if the same had been ratified in the meeting on September 29, 1992. We find from the minutes of the board meeting held on March 3, 1993, that, in this meeting the board had approved the closure of 18 offices, the names of which have also been indicated in the minutes. Thus, in view of the minutes of the board meeting dated August 7, 1992, having been confirmed in a meeting held on September 29, 1992, in which the petitioner was present and that the minutes of the meeting held on February 27, 1993, having been confirmed in the board meeting held subsequently which was also attended by the petitioner, we are not in a position to doubt the factum of holding of these meetings. As rightly pointed out by the counsel for the respondents, the decision to close the parcel offices is a matter within the competence of the management/ board and as long as the majority of the board approves such closure, an individual director cannot question the wisdom of the board. As far as the petitioner's contention that these offices were closed only with a view to release lorries for disposal by which the second and third respondents could get undue monetary benefits, we are not in a position to uphold this contention inasmuch as, as we have already held closure of the parcel offices is within the competence of the board and if the lorries become surplus by such closure, it is for the board to utilise these surplus lorries in a manner beneficial to the company.

10. Sale of lorries:

Shri Choudhary : During the period 1992-93, and 1993-94, 37 lorries were sold by the company for a price ranging from Rs. 18,000 to Rs. 30,000 whereas the market value of such lorries having been purchased from 1981, onwards would be more than Rs. 1.2 lakhs. The company has an excellent workshop wherein the lorries are always repaired and maintained to ensure that they are kept in an excellent working condition. Everyone knows that the lorries sold by the company would be in excellent condition and as such in great demand. The company is purported to have sold these lorries through auction. Annexure P11 collectively would indicate the mode of auctioning from which it is apparently clear that the same set of about ten persons seemed to have bid for each lorry and that the highest bidder had been chosen as the successful bidder. There is nothing to indicate as to how and when notices of auction were given and under what authority the sales manager had conducted the auction. All the annexures enclosed with the petition from pages 166 to 202 are all fabricated as there are a lot of discrepancies in many of them. Referring to the slips at pages 177 and 179, he pointed out overwriting in figures of the amount bid. He also pointed out that in the slips at pages 190 and 193 the second highest bidder is shown as one S.K. Ahmed who has signed at page 190 in Telugu and at page 193 in English. Further, he pointed out that most of the lorries sold were only to a few select persons. When such high value lorries of such a large number were being sold, there must have been a public notice and that the company should have fixed a reserve price. This was not done only because, there had been certain underhand dealings by way of collection of a much higher value for the lorries but accounting for a lower value. In this regard, he pointed out that, for lorry No. ABP-5424 allegedly sold to one Ms. Raghava by auction on August 24, 1992, for Rs. 30,000 (at page 171), she has obtained a hire purchase loan of Rs. 1.2 lakhs on September 27, 1992, as is evident from annexure P12. The petitioner himself had given a lorry of 1983, model on lease to the company and after getting the lease released, he sold the same for Rs. 1 lakh, the lorries at much higher price than what had been indicated. He also referred to certain affidavits obtained by the petitioner in this connection wherein the deponents have averred that they purchased the lorries at a much higher price than what is noted in the auction slips. Therefore, in the process of allegedly auctioning the lorries, the second respondent has derived huge undue benefits at the cost of the company and as such he should be directed to account for the same.

11. Shri Raghavan : The original allegation of the petitioner was that the company had sold the lorries at a throwaway price and now the allegation is that undisclosed amounts have been pocketed by the second respondent. For a long period of time, when the petitioner was a director of the company, the same procedure for disposal of unserviceable lorries was being followed and in the earlier occasions the petitioner himself had signed the transfer papers for lorries sold in similar auctions. He also submitted that after the Company Law Board passed an order on April 21, 1994, directing the company that vehicles should be sold only with the approval of the board, that procedure is being strictly followed and the price received for the vehicles of 10 to 12 years old fetch more or less the same amount as was received in the auctions impugned in the petition. No reliance should be placed on the affidavits file.d by the petitioner from certain persons in this regard inasmuch as these affidavits are found to have been dated in 1994, but have been produced only in 1995. Further, even though the petitioner undertook to present these persons for oral evidence in view of the respondents producing affidavits of denial from these very same persons, the petitioner could not produce them for oral evidence. Since there are 'Contradictory affidavits by these persons before the Company Law Board, no reliance should be placed on any of these affidavits other than what has been stated in the pleadings. Therefore, the learned counsel submitted that there is absolutely no merit in the contention of the petitioner that either the lorries had been sold at a throwaway price or the second respondent had received undisclosed monetary benefits from such sales.

12. Our findings : As far as this allegation is concerned, the same is linked to the earlier allegation that these lorries became surplus due to the closure of the parcel offices and that they were sold at much higher prices than what was recorded in the auction slips. The counsel for the petitioner brought out certain discrepancies in the auction slips and also pointed out that these lorries have been said to a few select people, thereby claiming that the entire exercise of the alleged sale through auction was a farce. To substantiate -their allegation that the lorries were sold for much higher prices than what was recorded in the auction slip, the petitioners have relied on the affidavits of one Adigarla Raghava who has stated that he purchased lorry ABP-5424 on August 24, 1992, for Rs. 1.75 lakhs while the receipt given was for Rs. 30,000, the affidavit of Desetti Narayanrao who has stated that he purchased lorry No. MEK-8343 on September 16, 1992, for Rs. 1.89 lakhs while the company gave a receipt for only Rs, 29,000, affidavit of Raghavulu in which he has stated that he purchased lorry No. AIQ-5524 for Rs. 1.4 lakhs and that a receipt for Rs. 18,000 was given to him. In the first two cases, the deponents had taken loan on hire purchase for Rs. 1,20,000 and Rs. 1,27,000 respectively as is evident from the documents attached with the affidavits. These affidavits are all dated March 23, 1994, but were filed along with the rejoinder dated September 19, 1994. The respondents in turn filed affidavits from the very same persons : Adigarla Raghava has stated in her affidavit denying the earlier affidavit stating that the said affidavit was a manipulation and that she did not know English and that she had not signed the said affidavit. She has also averred that she paid only Rs. 30,000 and the loan she took was for the purpose of repairing the lorry to put it in a running condition. Shri Desetti Narayanarao has also denied to have signed the earlier affidavit and he has affirmed that he paid only Rs. 29,000 for the lorry and that the loan taken by him was only for getting the vehicle repaired. J. V. Raghavulu has also denied to have signed the earlier affidavit and he has affirmed that he paid only Rs. 18,000 for the lorry purchased. Whatever may be the suspicion of the petitioners in regard to this allegation of pocketing the difference between the actual sale amount and what is shown in the auction slips, there should be some independent corroborative evidence. The evidence which the petitioner relied on through the affidavits of these three purchasers of the lorries can no longer be relied on in view of their subsequent affidavits. Even though the petitioner undertook to produce them for oral evidence, in spite of issue of summons, they were not produced. In other words, the allegation in this regard is unsubstantiated. Since this allegation is coupled with the allegation relating to closure of parcel offices, we ourselves directed the company to furnish the details of the sale of lorries in the subsequent years from which we find that the company has disposed of 28 vehicles during the years 1994-95 to 1996-97. Most of these vehicles are found to be 10-12 years old and sold for prices ranging from Rs. 23,000 to Rs. 60,000. A comparison of this with annexure P11 wherein a list of the lorries impugned in the petition, shows that the age of most of the lorries in this annexure was between 10-12 years and that the price also ranged from Rs. 22,000 to Rs. 60,000, even though the average price of the lorries sold in the later years was found to be higher by 15 per cent. to 20 per cent. Perhaps the higher price was on account of the direction that we gave that there should be more transparency in sale of lorries. Anyway we do not find the gap to be such a huge amount of about Rs. 1 lakh as alleged by the petitioners. Under these circumstances, since the allegation that the respondents had siphoned off the funds of the company is of a serious nature, unless and until some evidence to that effect is furnished, we cannot decide against them as it is a settled law that in case of allegations of fraud, siphoning off of funds, etc., full details should be furnished and mere suspicion cannot substitute proof. During the hearing, since we ourselves felt that the present system was not a foolproof system, we advised the company that a more transparent system should be evolved in disposal of lorries by fixing a reserve price and getting the approval of the board and giving a wide publicity, before conducting the auction. We feel that as far as this allegation is concerned, it is sufficient that we reiterate the above advice for future adherence and, accordingly, do so.

13. Diversion of funds :

Shri Choudhary ; The second and third respondents are in the habit of diversion of company's funds by way of payment of exorbitant commission with kickback arrangements. In a raid conducted in 1988, by the Income-tax Department it was noticed by them that certain firms in the benami names of these respondents had been paid substantial commission and as such all these expenditures were disallowed. Subsequently, these firms were dissolved and through benami arrangement, the respondents have floated two companies, namely, Hastina Auto Dealers Private Limited in New Delhi, and one Veekay Automotive Private Limited at Madras and appointed them as sole selling agents for auto products of the company on commission basis. These two companies were paid a commission of Rs. 84 lakhs during 1992-93. The managing director of Hastina is an ex-employee of the company and the son-in-law of the administrative manager of the company--Shri Krishnamurthy, who had signed the auction slips in respect of sale of lorries. In the same way, the managing director of Veekay is an ex-employee of the company. The share capital of these two companies is very meagre and it is inconceivable that they would earn a commission of Rs. 84 lakhs in one year. It is obvious that these two companies are being used as a conduit to divert the funds of the company by way of commission, to the personal benefits of the second and third respondents. Even though, the company has taken a stand that these two companies were selected on the recommendation of private consultants, the entire selection process was an eyewash inasmuch as the private consultant had overlooked much experienced and reputed dealers in preference to these two companies being the benami of the second and third respondents. He also referred to certain letters received from six persons who were shown in the report of the private consultant to have applied for dealership, denying that they had applied for the dealership. Further, he also stated that Hastina was incorporated only on October 26, 1990, and the advertisement calling for information was issued in July, 1990, and the report of the private consultant is dated October 16, 1990, recommending Hastina (page 131 of the reply). In view of this, Shri Choudhary, submitted that these documents are fabricated ones only to show that selection of these dealers has been made in a transparent manner even though it is apparent that they were selected only because they were benamis of the second and third respondents.

14. Shri Raghavan : The company was always having authorised dealers for marketing its products. Even though the Income-tax Department disallowed the commission paid to the firms, the Income-tax Appellate Tribunal and the High Court upheld the payment of commission holding that the firms were genuine and that the commissions were legitimate business expenses. Since these firms subsequently ceased to be in business, advertisements were released in leading newspapers calling for applications for dealership for North and South India and management consultants were engaged to recommend suitable dealers out of these applicants and they recommended these two companies for appointment as dealers. These appointments were made in 1989 (Veekay) and 1990 (Hastina) and till the petition was filed, the petitioner had not made any allegation on their appointments. Most of the commission received by the authorised dealers has to be passed on to the retail dealers. Further, these dealers have to keep their own staff and meet other business expenses. The company has to appoint only those on whom it has confidence. Other than expressing an unfounded allegation, the petitioners have not furnished any evidence that the commission paid to these two companies has been received as kickback by the second and third respondents. In regard to the allegation that some of the persons shown to have applied for the dealership have not actually applied, Shri Raghavan referred to the affidavit filed in February, 1999, by the respondents enclosing therewith the applications actually received from these persons at the time when the advertisements were released. Therefore, Shri Raghavan submitted that mere allegations are not enough but have to be established which the petitioners have failed to do.

15. Our findings : This allegation relates to selection of Veekay Automotives Pvt. Ltd., and Hastina Auto Dealers Pvt. Ltd., as the authorised dealers for the products of the company, that they are benamis of the second respondent. The petitioners have also questioned the authenticity of the reports of the private consultants. The company has not denied that Shri Vijay Kumar of Veekay was earlier an employee of the company or that the promoters of Hastina are related to an employee of the company. It is also admitted that a sum of above rupees 85 lakhs was paid as commission to these two companies in the year 1992-93. Regarding the allegation of the selection process, we find that an advertisement in The Hindu was issued on December 21, 1988 (annexure R9) inviting applications for dealership. In the same annexure the report of Ram Associates dated March 8, 1989, is enclosed. A perusal of the report shows that in addition to certain companies and firms, individual applicants had also been considered and that the name of Shri Vijay Kumar was recommended. Later, it is found that, Shri Vijay Kumar sent a letter to the managing director on March 30, 1989, that he had incorporated a company in the name of Veekay Automobiles Pvt. Ltd. In a board meeting held on April 4, 1989, the board authorised the managing director to negotiate and conclude an agreement with Veekay. The allegation of the petitioner is that Veekay were appointed as dealers even before incorporation and as such the report of the private consultant should be a fabricated one. From the contemporaneous records as indicated above, it is clear that it was Shri Vijay Kumar, who was recommended as the authorised dealer and that he later incorporated a company and that the board approved its dealership. In regard to Hastina, we find a copy of an advertisement in the Hindustan Times dated July 16, 1990 (annexure R10), inviting applications for dealership. In a board meeting held on September 21, 1990, the board noted about this advertisement and authorised the managing director to appoint a suitable dealer for Northern India. One Techma Engineers gave a report on October 16, 1990, in which it recommended Hastina on the ground that this dealer was prepared to work only for SRMT, thereby involving full business interest for SRMT while in the case of other applicants since they were already in a similar business it may not be possible to restrain them from handling competitors' products. The allegation of the petitioners is that this alleged selection process is fabricated. The petitioner filed an affidavit on December 3, 1998, enclosing therewith six letters from those who, according to the reports, of Techma/Ram Associates had applied for the dealership, to the effect that they had not applied for the dealership or that they had not heard from the company. The respondents in their reply affidavit on February 16, 1999, have filed copies of the original letters of application in their letter heads by these persons/entities. We also find that none of the letters produced by the petitioner is on any letter head and that these letters are dated sometimes in August, 1994, but were filed only in December, 1998. According to the petitioner, he had sent prepaid inland letters to these persons and they have sent their reply in those letters and as such there are no letter heads and that these letters were originally to be enclosed with the petition but due to misplacement of the same by the advocates, they were filed later. From the contemporaneous records, like advertisement, reports of the private consultants and the minutes of the board meetings, which all have been referred to earlier, we are of the view that we cannot find fault with the selection of these two entities as dealers for the company. We also note that the petitioner was a director for nearly three years after these appointments, and he does not seem to have raised this issue in any board meeting during this period, giving us an impression that he had no grievances in this regard till the same was raised in this petition. In regard to the allegation that these entities are benamis, and that the commission paid to these entities was received as kickback, no supporting material has been placed before us especially when the company has taken a stand that the commission paid to them is similar to commission paid to others. Thus on an overall assessment of the matter, we find that there is no substance in the allegation relating to these two entities.

16. Purchase of raw material :

In the written brief there is an allegation that the respondents have resorted to excessive invoices in purchase of raw material from Mukanda Iron and Steel and that they have also resorted to under invoicing to the tune of 50 per cent. while trading with Mehta Trading Company, Bombay. This matter was not argued and no reference was made to such allegation in the petition during the hearing and even the written brief does not give any details in this regard and as such, we are not examining this issue for want of full particulars.

17. Removal of the petitioner as a director :

Shri Choudhary : The petitioner was removed as a director in an extraordinary general meeting held on January 21, 1994, without following the provisions of Sections 284 or Section 190 of the Act. Since the petitioner was pursuing the matter relating to the closure of parcel offices and sale of lorries, the second respondent induced certain shareholders to issue a notice requisitioning an extraordinary general meeting under Section 169 of the Act to remove the petitioner as a director. When this notice was sought to be discussed in a board meeting held on November 18, 1993, the petitioner filed a civil suit challenging the said notice. Even though originally the court passed a restraint order, the same was vacated and in the extraordinary general meeting held on January 21, 1994, a resolution was passed removing the petitioner as a director. In that meeting the petitioner and other shareholders supporting him were not allowed to participate and he was not accorded the opportunity for explaining his position as envisaged under Section 284 of the Act. Once the board decided to convene the meeting as per the requisition, a special notice under Section 190 of the Act must have been issued by the requisitionists which was not done in this case and as such the proceedings in the meeting have to be declared as null and void. The provisions of Section 188 of the Act were also not followed. Further the notices for the meeting did not contain any explanatory statement as envisaged under Section 173 of the Act. Referring to B. G. Somayaji v. Karnataka Bank Ltd. [1995] 83 Comp Cas 649 ; [1995] 3 CLJ 334 (Kar), he submitted that explanatory statement is a must. Therefore, the removal of the petitioner as a director should be declared as null and void.

18. Shri Raghavan ; The removal of the petitioner as director was in full compliance with the provisions of law. When a requisition to remove the petitioner as a director was received by the company on November 5, 1993, before the matter could be considered in a board meeting convened on November 18, 1993, the petitioner obtained an order of injunction from a civil court. Later, when this order was vacated, in a board meeting held on December 27, 1993, it was decided to convene an extraordinary general meeting on January 21, 1994. Since the petitioner did not attend this board meeting and had sent a telegraphic representation, along with the notice, copies of this representation was circulated to all the members. Against this notice of the extraordinary general meeting, the petitioner filed a suit seeking for restraining the general body from considering this resolution to remove him as a director. This suit was dismissed and, thereafter, in the extraordinary general meeting held on January 21, 1994, the general body unanimously decided to remove the petitioner from the office as a director. As far as the provisions of Section 284 are concerned, this section envisages circulation of the representation of the directors sought to be removed and the only representation the company received was a telegraphic representation which was circulated among the members. The petitioner did not choose to attend the meeting to make oral representation. In other words, the general body decided to remove him after con-sidering the telegraphic representation and as such the provisions of Section 284 were complied with. In regard to special notice under" Section 190, the requisition notice received by the company was a composite one both under Section 169 as well as Section 190 in the format as prescribed in Palmers Company Law Precedents (at page 855, 17th edition). Therefore, the removal of the petitioner was in consonance with the provisions of law and had the support of all the shareholders who attended the said meeting and as such cannot be impugned.

19. Our findings : First, it is necessary to note that, in a Section 397 petition, directorial complaints cannot generally be agitated, except in cases of closely held companies, wherein the right to hold directorial position has been provided in the articles or the principles of quasi-partnership with right to participate in management is established. In the present case, it is an admitted position that the company was incorporated in 1944, and that the petitioner became a director only in the late 70s. Therefore, none of the exceptions is available to him to require us to adjudicate the issue of his removal. Yet since the issue has been raised we have examined the same. It is on record which is not denied by the petitioner, that nine shareholders requisitioned a meeting for passing a resolution to remove the petitioner as a director (annexure R13). Consequent to this, the petitioner had also taken certain legal steps as indicated earlier. Now, he is questioning his removal on the grounds that the provisions of Sections 284 and 190 of the Act were not followed in this process. Section 284 requires special notice for removal of a director and it also stipulates that any representation made by the director must be circulated to the members. As far as the circulation is concerned, circulation is possible only if the director makes a representation in writing. In this case, the petitioner has not complained that he made a representation and that the same was not circulated. As a matter of fact the company had circulated the telegraphic representation received from the petitioner. Therefore, there is no violation of Section 284 as far as circulation of the representation is concerned. In regard to special notice, the complaint is that in terms of Section 190, after the board convened the extraordinary general meeting, the requisi-

tionists must have issued a special notice 14 days before the date of the meeting, which had not been done. We are unable to support this proposition, Section 169 has to be read independent of Section 284. Once a notice under Section 169 is received by the company, it is bound to convene an extraordinary general meeting failing which the requisitionists themselves are entitled to convene the extraordinary general meeting. Since the notice itself indicates the business to be transacted in the meeting which is to be held within a stipulated time frame as provided in that section, the question of issuing a separate special notice under Section 190 does not arise. Anyway, we find that the notice requisitioning the meeting itself has indicated that the same might be treated as a special notice under Section 190 in line with the format given in Palmers (supra). Counsel for the petitioners referred to the provisions of Section 188 in this connection. We are of the view that the provisions of Section 188 are applicable, only in connection with an annual general body meeting and not in respect of a requisitioned extraordinary general meeting which is governed by the provisions of Section 169. In regard to the grievance that no explanatory statement under Section 173 had been enclosed with the notice, as held by the Company Law Board in Vijay M. Porwal v. Pentokey Organy (India) Ltd, [1996] 87 Comp Cas 331, it is not necessary to enclose an explanatory statement in cases of meetings convened on requisition under Section 169. The case of B. G. Somayaji v. Karnataka Bank Ltd, [1995] 83 Comp Cas 649 (Kar), it is to be noted that in this case, the court injuncted the company from holding the extraordinary general meeting in the absence of an explanatory statement, but the Supreme Court vacated the stay on the company agreeing to circulate relevant explanatory statement. The decision of the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 may be referred to in this connection, wherein the apex court did not agree with the contention that the explanatory statement should accompany the notice convened on requisition under Section 169. Thus we find that the removal of the petitioner as a director does not suffer from any legal infirmity.

20. Rights issue :

Shri Chaudhary : The rights issue made by the company in January, 1994, was not made for any bona fide business purpose. This issue was made all of a sudden without any discussion in any board meeting or the general body meeting held on September 25, 1993. The main purpose of the issue was to bring the shareholdings of the petitioners below ten per cent. There was no need for the company to have gone in for this issue as no expansion or modernisation was on the anvil and that even such expansion could have been made with the existing resources of the company. In this connection, he referred to Mrs. Farhat Sheikh v. Esemen Metalo Chemicals P. Ltd. [1995] 1 Comp LJ 158 ; [1996] 87 Comp Cas 290 wherein the Company Law Board held that the directors cannot use their powers to issue further shares except in the interest of the company. In Standard Industries Ltd. v. Mafatlal Services Ltd. [1992] 2 CLJ 113 ; [1994] 80 Comp Cas 764 (CLB) the Company Law Board has held that rights issue in a closely held company can be oppressive to the members. Reference was also made to Hemant D. Vakil v. RDI Print and Publishing Pvt. Ltd. [1992] 2 CLJ 113 (CLB) ; [1995] 84 Comp Cas 838 in this regard. The company mobilised about Rs. 1.48 crores out of this issue but no modernisation or expansion had taken place thereafter and there has been only a marginal increase in production in the subsequent years. Since the company had a reserve of about Rs. 12 crores, the company could have issued bonus shares to improve its debt equity ratio instead of issuing rights shares. It was done only with a view to oppress minority shareholders. Further, even though the petitioner deposited the requisite amount for his rights entitlement, the shares were allotted only in the year 1997, on the ground that one of the joint shareholders had not signed the application form. It is in the knowledge of the company that the said joint holder had expired. By this late allotment, the petitioner could not get dividend for three years nor was he paid any interest during this period.

21. Shri Raghavan : It is within the competence of the board to issue further shares. The issue was made on rights basis and not on a preferential basis, which would have meant to dilute one's shareholding. The shares were offered at par value to each and every member of the company in proportion to their holding even though the intrinsic value of shares was much higher. All the shareholders including the petitioners have taken their entitlement. Therefore, the purpose of the issue being to reduce the petitioners to below 10 per cent. as alleged is absolutely baseless. If the intention of the respondents had been to reduce the petitioners shareholding, nothing prevented them to pass a resolution under Section 81(1A) for allotment of shares in exclusion of the petitioners. The purpose of the rights issue was modernisation and replacement as decided by the board in a board meeting held on July 29, 1993 (annexure R15). He also referred to other connected documents in this annexure to show that the additional share capital was raised, after detailed examination for the purpose of expansion/modernisation. He further referred to the annual reports for 1994-95, and 1995-96, to show that there had been substantial increases in the fixed assets of the company created out of the further issue of shares. In regard to the suggestion made that instead of issuing rights shares, bonus shares should have been issued, he submitted that by issue of bonus shares, no funds could be raised and since the company needed funds, rights issue was made. As far as the delay in allotment of shares is concerned, the company was not aware of the death of the joint holder and that after repeated attempts only, the death certificate of the joint holder was received by the company in 1997, after which the shares were allotted. Accordingly, no fault could be attributed to the company in regard to the delayed allotment.

22. Our findings : When the first petition was filed, the petitioners sought for restraining the company from allotment of shares pursuant to the decision to issue further shares more or less on the same grounds that have been advanced now. We declined to grant the prayer except stipulating that the unsubscribed shares would have to be allotted in the same manner in which it was made during the earlier issue of shares in 1990-91. The allegation in this regard is two fold--one is that the purpose of issue was to reduce the petitioners to below ten per cent. and the other is that the company was not in need of funds. As far as the first ground is concerned, it is beyond our comprehension as to how a rights issue, as long as the offer is accepted, could reduce one's shareholding. Such an eventuality would arise only in case of a preferential allotment in exclusion of some shareholders. We also find that it is not the first time that the company made a rights issue. On an earlier occasion in 1991, such an issue was made. Therefore, we cannot subscribe to the view of the petitioners that the rights issue was made with an oblique motive especially when it will have effect on nearly 90 per cent. of the shareholders other than the petitioners who hold only around 10.6 per cent. shares. Shri Choudhrary relied on Mrs. Farhat Sheikh v. Esemen Metalo Chemicals P. Ltd. [1996] 87 Comp Cas 290 (CLB) ; Standard Industries Ltd. v. Mafatlal Services Ltd. [1994] 80 Comp Cas 764 (CLB) and Hemant D. Vakil v. RDI Print and Publishing Pvt. Ltd. [1995] 84 Comp Cas 838 (CLB) in all which cases, the Company Law Board had declared that the issue of rights shares was an act of oppression against the minority. In the first case, what was impugned in that case was not a rights issue but shares allotted to only one group which was declared to be invalid on the facts of that case. In the second case, shareholders holding 48 per cent. shares objected to the rights issue proposed by those holding 52 per cent. Since substantial shareholders objected to the issue of rights shares, the Company Law Board declared the rights issue as invalid. In the third case, again, it was issue of shares only to one group which resulted in creation of a new majority, which the Company Law Board held as invalid. However, in the present case, the facts are different. Members holding nearly 90 per cent. shares in the company have no complaints in this regard and as such cannot be compared with the facts of the cases cited by learned counsel. It is also on record that the petitioners also applied for their rights entitlements and were allotted their rights entitlement. As far as the need for funds of the company, the company has produced enough material as indicated earlier as a part of the arguments of Shri Raghavan to show that not only the company was in need of funds and that the same has been utilised in a manner to improve the working of the company. In regard to the contention of the petitioner that instead of issuing further shares, the company should have issued bonus shares, it is within the exclusive jurisdiction of the board to decide these matters and as a judicial body, we cannot question the wisdom of the board in this regard. To sum up, we do not find any substance in the allegations of the petitioners in regard to the rights issue. However, we find that the grievance of the petitioner relating to delayed allotment of the shares has substance. We are not in a position to appreciate the stand of the company that the death of a family member was not known to the persons in management, viz., second respondent for over three years to allot shares applied for in 1994, in 1997. Personal differences should not come in the way of discharging statutory responsibilities. The delayed allotment has denied the petitioner the benefit of dividend declared. Therefore, we are of the view that the petitioner should be compensated at least to the extent of the dividend that he would have been otherwise entitled to if the shares had been allotted in time. Accordingly, we direct the company to compensate him by payment of interest at the same rate at which dividends were declared and paid in respect of the delayed period within a period of one month from the date of receipt of this order.

23. Donation to a non-existent trust:

Shri Choudhary : In the year 1995-96, the company gave a donation of Rs. 10 lakhs to one Srinivas Charity Trust in which the second respondent and his family members were the trustees. This trust was wound up as per the resolution of the trust dated May 30, 1992. In the guise of giving a donation to a non-existent trust, respondents Nos. 2 and 3 have diverted this amount for their personal benefits. Since the respondents have not filed the original minutes book of the trust, its bank accounts, pass books, etc., adverse inference should be drawn that the trust was not in existence and that the money has been siphoned off.

24. Shri Raghavan : This allegation was not a part of the original petition but was raised in a subsequent application, viz., C. A. No. 65 of 1996. In an order dated December 18, 1997, the Company Law Board has already dealt with this allegation rejecting the contention of the petitioner after perusing all relevant documents including original minutes books of the trust, income-tax assessment order, etc. This order of the Company Law Board was taken on appeal to the Division Bench of the Andhra Pradesh High Court which dismissed the appeal and the special leave petition filed thereon was also dismissed and as such this matter cannot be reagitated by the petitioners now. In the absence of any fresh material before the Company Law Board to controvert the stand of the respondents that the trust was never dissolved and is still in existence, the Company Law Board cannot deal with this matter once again as it would mean review of the earlier order which power has not been conferred on the Company Law Board.

25. Our findings : As far as this issue is concerned, in the absence of any fresh material placed now than what was before us at the time when we passed the order on December 18, 1997, we close this issue by recording our finding in that order which reads as follows : "what we are concerned now with is, whether, there was a donation and if so, whether the same has been given to an existing trust or to a non-existent trust. If such a donation is purported to have been made to a non-existent trust, then, the allegation of the petitioner would require consideration. It is evident from the independent records produced by respondents Nos. R-3 and R-4, that the said trust continued to be in existence even in the year 1995-96. Therefore, the factum of the trust being in existence has been established. Further, about the existence of the trust, the respondents have pointed out with reference to a letter written by the petitioner, that even the petitioner admitted, by his own version that the trust was in existence during 1994-95, and that he was a trustee of the trust. Considering all these facts, we are of the view that the petitioners have not been able to establish that the donation have been made to a non-existent trust."

26. Discrepancies in stock of finished products :

Shri Choudhary: The annual report of the company for the year 1994-95, shows a substantial gap between the opening stock plus production minus closing stock and sales worth crores of rupees was diverted by the second and third respondents for their own benefits. The company manufactures king pins, shaken bolts, C and B, F shafts and tubes, king pins bearings, trust washers, cotton pins, king pin bushes, wheel bolts, water pump shafts and other miscellaneous items. All those items are put together in one item. The licensed capacity of this item for 1995-96, is 34 lakhs. Installed capacity is 36 lakhs. For the year 1995-96, the production under this head was stated to be 39,22,383 units. Sales were shown as 5,72,499 units. There is a variation of 33,63,576 numbers under this head. This was for the year 1995-96. For the same item, for the year 1994-95, the difference is 19,50,193 numbers. The value of this difference runs into crores of rupees. For this the respondent-company in its counter-affidavit admitted this discrepancy, but stated that the difference in variation represents sale of "other items" and the same is reflected in the money value of the sales. However, neither in the counter-affidavit nor before the Company Law Board during the course of arguments what does "other items" mean has been explained. No details were furnished. Similar is the variation with reference to another item of spare part, i.e., piston pin. Even for this also, variation is admitted but the respondent-company states that the sales were reflected in the value of the sales and further states that those represent the sale of "other engine parts". Even here also what the "other engine parts" is not disclosed. No details were furnished. Excepting the king pin and its ancillaries, tired ends kits, drug lines, U. J. crosses and piston pins, there is no other part which the company manufactures. All these four heads of parts are independent, individual and are highly valuable. They cannot be sold with any other items. The production and sales have to be separately shown. In so doing, large scale misappropriation is resorted to by the respondent. The total misappropriation for the years 1989-90 to 1995-96, would come to Rs. 186.49 crores even taking into consideration the balance-sheet of respondent No. 1-company for the relevant years coupled with their price list. It is further submitted that with regard to one item known as "piston pins" this is an item which is sold in sets. Each set consists of six pieces. Even as per the annual reports, which are public documents filed on behalf of respondents for the year 1994-95, there is a variation of 92,107 numbers. There is no explanation for this shortfall. The vague allegation in the counter that the production under this head also includes other engine parts is vague as anything. No details were furnished. There is no other engine part which the company manufacures. Therefore, the respondents are guilty of mismanaging the affairs of respondent No. 1-company and thereby defrauding the public at large and authorities in particular. The respondents instead of properly and correctly explaining as to the variation and discrepancies in the stock pattern came forward with an evasive answer that they are following the same method for the last 25 to 30 years. It is humbly submitted that such improper and defective method, even if followed for such a long period of 25 to 30 years would not cure the defects and it is only a lame excuse. It clearly shows that respondents Nos. 2 and 3 defrauded the respondent-company consistently for a number of years and the misappropriation runs into crores of rupees. Only an investigation into this matter would bring out the correct position.

27. Shri Raghavan : The company has filed a detailed counter pointing out that there is no discrepancy and only an incomplete narration of the items under these heads. The company manufactures over 400 items of automobile spares. This is borne out by the price list produced before this Hon'ble Bench in the interim application. Since engine parts and chassis parts were subject to different rates of excise duty, there is a broad classification, which has now ceased to be relevant, since there is no such differential rates in excise duty. It is the deficiency or incomplete narration which is explained in the counter and in order to clear any doubts the respondents have placed before the Bench (a) complete day-wise details of production of all the 400 items as reflected in the RG-1 registers maintained under the Central Excise Act and periodically verified and signed by the authorities. These registers were made available at the hearing of the interim application and also at the hearing of the main company petition. The said registers disclose (1) the stock in hand at the beginning of each day of each particular item, (2) the production, if any, during the day, (3) the removal for sales, and (4) closing stock. Thus there is unimpeachable material available regarding the production, (b) The relevant invoice books of several volumes for the period were produced before the Bench, (c) The respondents have also filed full details of all the 30,000 and odd invoices made during the financial year 1994-95, with full particulars of the date of invoices, the number of the invoices, description of the articles sold, and the amount. Thus sales of all the items effected during the year are furnished. These statements, which are running into hundreds of pages, have been prepared from the primary records. The reconciliation has also been prepared and filed which shows that there is no discrepancy at all, if the information furnished is read and understood in the proper fashion. In fact, the ninth petitioner himself admits that in the succeeding year, the narration has been rectified and the so-called discrepancy is no longer there. This itself would demonstrate that the petitioner is attempting to take advantage of an incomplete narration to build up a case of huge diversion of funds which has no factual basis. It is also submitted that unless the sales of these products are taken into account, the total sales realisation/turnover of the year over Rs. 32 crores cannot be achieved. Yet another fallacy in this argument is that if the narration of a particular item is incomplete, it is to be confined to that item and the entire numbers are treated as falling under that item, their value would be something totally different. For instance, against king pins, the complete narration should be king pins and other parts. If the number indicated against this item is treated as only referring to king pins, it will show a production of king pins far in excess of what is reflected in the RG-I register and valuewise the entire number is treated as king pins and not including the other miscellaneous parts, the figure will be different. It is, therefore, submitted that since the original unimpeachable records of production and sales are available and have been put before the Bench and detailed extract compiled therefrom, there is no room for any suspicion that the production and sales figures are not correct or that there is any suppression of closing stock. Since the position is so clear, the question of any investigation in this matter does not arise.

28. Our findings : This allegation was not in the original petition but was later raised in C. A. No. 65 of 1996. In the order dated December 18, 1997, we have covered this allegation expressing our prima facie opinion that the petitioner had not made out a case establishing that there has been diversion of stock from the factory without being accounted for in the books of account. However, we also indicated in that order that we did not propose to give any finding on this allegation at that point of time since the company had agreed to give full details of the production, sales and closing stock together with a statement of reconciliation. The company has furnished, as pointed out by Shri Raghavan, a compilation indicating therein invoice-wise sales and the sale value for the year 1994-95, and also gave a consolidated statement reconciling opening stock, production, sales and closing stock for the year 1994-95, to indicate that the figures as shown in the balance-sheet were correct and that the apprehension of the petitioner that there has been undisclosed removal of stock due to incomplete narration of closing stock in the balance-sheet. We are inclined to agree with the respondents especially in view of the fact that the petitioners themselves admit that in the subsequent years, full narration of the closing stock have been given and that there is proper tally of the opening stock plus production minus sales and closing stock. In view of the statement we ourselves tried to examine this issue through the figures of turnover. The turnover arising out of sale of SRMT products are as follows : 1994-95--Rs. 32.9 crores ; 1995-96--Rs. 38.27 crores ; 1996-97--Rs. 42.92 crores ; 1997-98, Rs. 43.30 crores. According to the allegation of the petitioners, the closing stock figures in 1994-95, reveal diversion of various products to the tune of about Rs. 30 crores. In the later years, according to them, there is no discrepancy. If that is so, then, the turnover of the company out of the sale of SRMT products should have shown an increase of at least Rs. 30 crores. Instead, we find that there is only a gradual increase in the turnover. The company has unhesitatingly admitted that the description of closing stock which was being followed for a number of years could have been made more comprehensive than what was shown in the balance-sheet. Now, the company itself is giving complete description of the closing stock. We had, in our order dated December 18, 1997, observed that such a large defalcation of the production could have never taken place in view of the products of the company being subjected to both sales tax as well as central excise duty. Therefore, we are of the view that the non-supply of full description of the closing stock cannot be assumed to be the result of diversion of production of the company. In other words, the petitioners have not been able to establish that the respondents are diverting the products of the company without accounting for the same.

29. Other acts of mismanagement:

Shri Choudhary : The register of members of the company is being manipulated according to the whims and fancies of the second respondent. Since the company is a private limited company, the number of shareholders cannot exceed 50 as per Section 3(1)(iii) of the Act. As per the annual return for 1993-94, the number of shareholders is 62. One of the shareholders Smt. Soma Lakshmi died in the year 1975. However, the shares were not transmitted in the name of the legal heirs. Later, with mala fide intention, the company recognised one K. V. Ramesh, the son of the deceased as the shareholder even though the deceased had two other daughters. Afterwards, the shares were transferred to another shareholder Smt. Anapurna along with two others. The husband of the deceased filed a petition for declaration that he and his children were the nearest legal heirs and as such shares should be transmitted in their names. Only with the order of the court, could he get the shares registered in his favour. Shri Choudhary also alleged that respondents Nos. 2 and 3 have been siphoning off the company funds/incurring wasteful expenditure. According to him, the golden jubilee celebration of the company was spread over two years by incurring more than Rs. 65 lakhs. The celebrations could have been curtailed to one year and instead of spending such a huge expenditure, the same could have been distributed as dividend to the shareholders. The entire exercise in this regard, he submitted was only to strengthen the position of respondents Nos. 2 and 3. He further submitted that there are certain associated companies from which the company is purchasing material at much higher prices than the prevailing market price. In the same way, vehicles are taken on hire from the associated companies and they are being paid higher lease rentals than the market rate. In the year 1994-95, there was a shortfall of Rs. 1.55 crores in the cash flow. Further, these two respondents are using the company properties like vehicles, machines, materials like cement, iron, bricks, etc., for construction of a private community hall, named after the mother of the second respondent. Approximately, the value of such material diverted could be about Rs. 60 lakhs. In the same way, these respondents are also constructing a star hotel in Kakinada only out of the funds and materials of the company. At the time of filing affidavits by way of evidence of petitioner No. 1 and petitioner No. 9 by affidavits dated June 20, 1995, three persons namely Shri Relangi Nageswara Rao (lorry driver), R.S. Prakasha Rao (lorry driver) and Shri Gudivada Suryarau (carpenter) had given affidavits dated August 6, 1994. The carpenter Shri Gudivada Suryarau had clearly stated that the window and door frames were prepared in the workshop of the respondent for the Hotel Jaya being constructed by respondent No. 2. The lorry driver has also said that cement bags from SRMT production centre to Jaya International Hotel were transported by him while he was working as a lorry driver for SRMT. Similarly, Shri Relangi Nageswara Rao, lorry driver has also said that he had carried 1,200 cement bags from SRMT for the construction of Jaya Hotel. The carpenter, Shri Gudivada Suryarau, was forced to retract his statement and stated in the affidavit sworn on April 6, 1998, that he signed the affidavit dated August 6, 1994, on the ground that the said document was required by petitioner No. 9 for getting a permit for carrying goods for his construction. This affidavit has been clearly obtained by influence and pressure and part of the money given by the company for obtaining the said affidavit has been immediately paid to Padmalaya Finance as there was pending due to the loan obtained by him.

30. Shri Raghavan : For computing the number of members, the employees, ex-employees and deceased members have to be excluded and if it is done, then, the number of members in the company is in accordance with Section 3(1)(iii) of the Act. In 1993-94, of the 62 members, 11 were employees and Smt. Soma Lakshmi, had expired, Excluding them, the number of members was 50. The legal heirs of the deceased lodged duly executed transfer forms to transfer 1,260 shares in favour of Smt. Anapurna and later on by fresh transfer deeds, these shares were transferred in the joint name of herself, Shri Ramesh and two others and this transfer was approved in a board meeting held on January 29, 1994, much before the first petition was filed. As far as the application of Dr. Subbarao was concerned, the company could not comply with his request as it would take the number of members beyond 50. Shri Subbarao filed a petition before the Company Law Board in 1978, which was dismissed by the Company Law Board. He further submitted that when the legal heirs have not chosen to complain, this matter cannot be agitated by the petitioners in this petition. It is a fact that the company spent about Rs. 65 lakhs in connection with the Golden Jubilee Celebrations. The expenditure was mainly upon goodwill payment made to the staff and release of advertisement, etc. Of the Rs. 65 lakhs, Rs. 30 lakhs were paid as a special bonus to the staff, which was in the interest of the company. The celebration took place for only one year from December 1, 1993, to November 30,1994, but the expenses were reflected in two accounting years, viz., 1993-94, and 1994-95. All the shareholders including the petitioners received mementos on this occasion. Since, such an occasion is very rare, it is but natural to celebrate the occasion with release of advertisement, etc. As far as inter company transactions are concerned, they have all been at prevailing rates and the petitioner was fully aware of the same as he was the managing director/director of some of the companies. Since no details have been given that undue benefits have been bestowed on these companies, there is nothing to adjudicate on this vague allegation. As far as the allegation that the company funds and materials are being utilised for construction of the community hall or hotel, no details have been furnished other than certain affidavits from erstwhile employees, which have also been later distracted by these deponents. The petitioner could not produce them for oral evidence in spite of opportunities given. In other words, all these allegations relating to either wasteful expenditure or diversion of funds/materials of the company are baseless and unsubstantiated.

31. Our findings : We are in general agreement with the submissions of the counsel for the respondents as far as the allegation relating to the membership register and expenditure incurred in connection with the Golden Jubilee Celebrations. In regard to the diversion of funds/material to a hotel or the hall, the allegation is based on affidavits of certain persons who have later retracted from the same. In view of this, the attempt of the petitioner to produce the deponents of these affidavits, whatever might be the reason, did not materialise. We have no independent material placed before us to examine this issue other than the allegation and the denial. Since, as we have already pointed out, this allegation, being of serious nature, should have been supported by some material which the petitioner has not been able to provide and as such we have to ignore these allegations.

32. Summing up his arguments, Shri Chaudhary submitted that the second and third respondents are conducting the affairs of the company as if it is their own without realising that it is an incorporated company. The petitioner is not pursuing the matter for his own benefit or because of the estrangement in the relationship with these respondents. He is interested in the wejfare of the company and all the shareholders. The material placed in the petition as well as in various applications would clearly indicate that all is not well with the company. Even though the petitioner could obtain various affidavits to substantiate the allegations in the petition as referred to by him earlier, yet, all the deponents of the affidavits have later retracted due to threat and intimidation by the second and third respondents. Therefore, he submitted that an independent investigation into the affairs of the company would substantiate the allegations made in the petition. He also submitted that even assuming that the various reliefs sought for by the petitioners could not be granted, yet, the Company Law Board is not powerless to grant appropriate equitable relief. For this proposition, he relied on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1982] 1 CLJ 1 (SC).

33. Concluding his arguments, Shri Raghavan, stated that in the entire petition, there is no allegation of any oppression other than expression of unfounded allegation regarding issue of rights shares. All other allegations relate to management of the company. The respondents have clearly established that none of the allegations merits consideration. The prayer for investigation as sought for by Shri Choudhary is uncalled for inasmuch as no roving inquiry can be ordered when the petitioners have not been able to substantiate any of the allegations. In this connection, he referred to the decision of the Calcutta High Court in Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Cas 119. He further submitted that all the shareholders other than the petitioner are happy with the affairs of the company as the company has been doing extremely well during the last ten years as is evident from the chart given on the performance of the company. The turnover of the company increased from Rs. 45 crores in 1988-89, to Rs. 110 crores in 1997-98, and the reserves from Rs. 4.25 crores to Rs. 12 crores during that period. The gross block rose up from Rs. 11.6 crores in 1988-89, to Rs. 34.15 crores in 1997-98. The company has also increased the dividend from 10 per cent. in 1988-89, to 18 per cent. in 1994-95, and is still maintaining the same rate of dividend. Therefore, it is unfortunate that the petitioner out of his personal animosity should make such unfounded allegations against the affairs of the company. He also submitted that there has been overwhelming support by the shareholders to the present management as is evident from all the resolutions proposed by the management being passed in the general body unanimously. Therefore, he submitted that the petition should be dismissed and considering the facts of the case, the question of grant of any equitable relief does not arise.

34. An analysis of the allegations would show, as rightly pointed out by Shri Raghavan, that other than the allegation relating to issue of rights shares, no other acts of oppression qua shareholders has been agitated in this petition. All other allegations relate to the management of the affairs of the company. From the narration of Shri Raghavan about the performance of the company over the last few years, we find that not only the turnover of the company has gone up, the shareholders have been rewarded with higher rate of dividend and that more than the majority of the shareholders support the present management. Further from the findings that we have given on each of the allegations, it is apparently clear that the petitioners have not been able to establish any of the allegations meriting the grant of any of the prayers in the petition. As far as the prayer stressed by Shri Choudhary that an investigation into the affairs of the company would establish the allegations, we would like to go by the decision of the Calcutta High Court in Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Gas 119 as cited by Shri Raghavan as we have seen that while some of the allegations have arisen out of apprehension and suspicion, others have not been established. However, it is not that, when allegations are not established in a Section 397/398 petition, that, such a petition has to be dismissed. As pointed out by Shri Choudhary, relying on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas.743 (SC), considering the facts and circumstances of a case, the Company Law Board is competent to pass appropriate orders with a view to put an end to the acts complained of taking into consideration the interest of the company and the shareholders. In Yashovardhan Saboo v. Groz-Beckert Saboo Ltd. [1995] 83 Comp Cas 371 (CLB), even though the allegations raised in the petition were not found to have been established, considering the fact that it would be in the interest of the company that the petitioners' shares should be purchased by the respondents, the Company Law Board directed accordingly. The petitioners are closely related to the second and third respon-

dents, the petitioner being the son-in-law of the second respondent. The petitioner held certain positions in other associated companies besides being a shareholder in those companies. He has been divested of the position he held in all these companies. The relationship between the petitioner and the respondent has become so strained that, it would not be possible for them to carry on together. In this connection it is to be noted that only the second and third respondents in addition to the company secretary have been made respondents to this petition and no other director has been impleaded. Admittedly, the petitioner is in a position to con-trol about ten per cent. shares in the company and his continuing as a member of the company with possible litigation in future is not in the interest of the company and other shareholders as besides the present petition, the petitioner also filed a writ in the Andhra Pradesh High Court seeking investigation into the affairs of the company, in which, while the Division Bench granted the prayer, the same was set aside by the Supreme Court. Therefore, we are of the firm view that in the interest of the company and other shareholders, the shares held by the petitioners should be purchased either by the respondents or the company itself so that unnecessary litigation could be prevented. As a matter of fact, when we made this suggestion during the hearing, the petitioner was agreeable but not the respondents. Considering the facts of this case and in accordance with the provisions of Section 402 of the Act, we direct that the shares held by the petitioners (whoever is willing to sell) should be purchased either by the respondents themselves or by the company, as may be decided by the respondents. In case the company is to purchase the shares, consequent reduction in the share capital may be effected by authority of this order. To give effect to our directions, it is necessary that the shares of the company are valued by an independent chartered accountant. For valuation of shares, it is necessary to prescribe the date of valuation. Normally, the date of valuation is fixed as the date of the petition. In this case, in the normal course the date of valuation should be the date of the immediate last balance-sheet after filing of the petition, i.e., March 31, 1994. However, in this case, the same may not be appropriate for the reason that additional shares were issued in the last quarter of 1993-94, which will have impact on the share value, which will not be fair to the petitioners especially when shares were allotted to the petitioner only in 1997, even though he remitted the money in 1994. Thus ; in the facts of this case, we stipulate that the valuation will be based on the balance-sheet as on March 31, 1998. For the purpose of valuation, the company may approach either S. Gopalakrishnan, Lovelock and Lewies, Chartered Accountants (Hyderabad Telephone No. 3301365) or Shri Shanti Lal Daga of S. Daga and Co., Chartered Accountants, Hyderabad (Telephone No. 231740) for determining the value of the shares. The company will negotiate the fees payable to the valuer and bear the same. Both the petitioners and respondents are at liberty to make both oral and written submissions before the valuer who will take such submissions into consideration while arriving at the value of the shares. The valuation report should be submitted on or before October 31, 1999, to the company as well as the petitioner with a copy to this Bench. The valuation made by the valuer will be binding on both the sides. Within a period of one month from the date of receipt of the valuation report, the respondents, on receipt of the shares along with blank transfer forms from the petitioners, pay the consideration for the shares at the rate determined by the valuer.

35. With the above directions, we dispose of the petition, with the liberty to apply in the case of any difficulty in implementing this order.

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Company Law Board

Karedla Suryanarayana And Ors. vs Ramadas Motor Transport Limited And ... on 18 June, 1999

Equivalent citations: [1999]98COMPCAS518(CLB)