Company Law Board
M.M. Subrahmanyam, M.S. Prakash, T. ... vs Gulf Olefines Private Limited, M.S. ... on 7 November, 2002
Equivalent citations: [2003]116COMPCAS115(CLB), [2003]45SCL240(CLB)
ORDER
K.K. Balu, Member
1. The petitioners holding more than 10 per cent of the paid-up capital in M/s Gulf Olefines Private Limited ("the Company") as well as constituting more than one-tenth of the total number of members have filed this petition under Section 397/398 of the Companies Act, 1956 ("the Act") alleging various acts of oppression and mismanagement in the affairs of the Company.
2. The main acts of oppression and mismanagement relate to non-convening and holding of the meetings of Board of directors and general body of the Company, cessation of petitioners 1 & 2 as directors of the Company, illegal co-option of respondents 3 to 5 as directors, illegal allotment of the impugned shares in favour of respondents 2 to 11, violation of various provisions of the Central Excise Act and rules made thereunder, siphoning off funds of the Company and encumbering the Company's properties without authority of the Board of directors and without deriving any benefit for the Company.
3. Shri A.K. Mylsamy, Advocate appearing for the petitioners, while initiating his arguments submitted that the petitioners as well as respondents 2 to 5 are belonging to the same family related to each other. The petitioners were holding 74 per cent of the paid-up share capital and the respondents group 25.99 per cent. The Company is a family company, each member looking after one company separately in exclusion of the other family members and without interference by any of them. The second respondent was looking after the day-to-day management of the Company since its incorporation till August 1995. However, the second respondent was not convening and holding the meetings of the Board and general body for more than a decade in spite of the repeated requests made in writing by the first petitioner. The second respondent while corresponding with the first petitioner had stealthily recorded the proceedings as if the petitioners 1 & 2 had ceased to be directors of the Company with effect from 21.2.96 on the ground that they had failed to attend three consecutive meetings of the Board, thereby vacating the office as directors under Section 283(1)(g) of the Act. In this connection, Shri Mylsamy drew our attention to the Directors' Report for the year ended 31.3.96 (Annexure A-14) to show that the petitioners ceased to be directors with effect from 21.2.96 by virtue of Section 283(1)(g) and that the second respondent, the lone Director co-opted the third respondent on 21.2.96 as a director, which is not valid in law. However, the second respondent failed to take this stand in his various correspondences with the first petitioners. In this connection, Shri Mylsamy referred to Annexure A-2 to A-8; A-10, A-18 to A-22 exchanged between the first petitioner and second respondent. No notices were sent to the petitioners for any of the Board meetings said to have been convened by the second respondent. The certificate of posting for having sent notices for the Board as well as general meetings are all fabricated. It is not safe to rely upon the certificates of posting. No Board meetings were ever conducted by the second respondent. In the circumstances, the petitioners 1 & 2 could not have ceased to be directors of the Company by virtue of Section 283(1)(g). The petitioners never received any intimation from the second respondent that they ceased to be directors of the Company. Consequently, co-option of the third respondent as director on 21.02.96 and appointment of respondents 4 & 5 ad directors on 22.02.96 without notice to the petitioners and without quorum cannot be valid. According to Shri Mylsamy, quorum is absolutely required even at an additional meeting of the Board of directors under Section 288 and even at the adjourned meeting, if there was no quorum, the meeting stands cancelled and no business can be transacted. In this connection, he relied upon (1995) 3 CLJ 418 (Raj) Maharani Yogeshwari Kumari v. Lake Shore Palace Hotel (P) Ltd to show that an adjourned meeting without quorum is not permissible under the Companies Act. He further referred to Article 91 of the Articles to show that when the number of directors is reduced below the number filed by the Articles, the continuing directors may act for the purpose of increasing the number of directors and pointed out the difference in language between Article 91 and Regulation 75 contained in Schedule I, Table-A of the Act. While Article 91 empowers the continuing directors, Regulation 75 uses the words "the continuing directors or director". The only situation contended in Table 'A' to the Act is that if the number is reduced below the quorum fixed under the Act for a meeting of the Board and vacancy in the Board, the only member present in the meeting can co-opt a director. In the instant case, co-option of the third respondent by the second respondent is not proper and illegal. The Board consists of 3 directors, and two of them are petitioners 1 & 2. The second respondent alone will not constitute quorum. In view of this, the second respondent could not have co-opted the third respondent as a director and all proceedings held on or after 21.02.1996, wherein third respondent participated are null and void. He further pointed out that meeting of the Board of directors without notice to directors is not valid as has been held in (1974) 44 CC 1 (SC) Parmeshwari Prasad Gupta v. UOI. It is for the same reason, Shri Mylsamy submitted that the allotment of the impugned shares, 55,000 shares on 02.03.1996, 21,000 shares on 23.05.1996 to respondents 2 to 5 and 600 shares on 24.05.1996 to respondents 6 to 11, employees of the Company in favour of respondents 2 to 11 are also illegal. Even according to the respondents at para 14 of counter the impugned allotments were made for sentimental reasons which deserve to be set aside. The allotments are not in the interest of either the shareholders or the Company. The object of the allotments is to reduce the petitioners' holding from the existing majority. No additional funds were generated by the allotment of impugned shares. The respondents have produced only an extract from the ledger maintained by the Company disclosing cash payments and not any bank statement. The company ought to have sold its assets to discharge its liabilities instead of augmenting funds by allotment of shares to settle the creditors. The cash payment in favour of the sundry creditors is fictitious. No document has been produced giving particulars of the sundry creditors. Moreover, the second respondent ought to have utilized the sale proceeds of the plant and machinery belonging to the Company amounting to Rs. 23,50,000 in discharge of the liability for the sundry creditors, if any. The Company has closed its business as early as in the year 1992 and there was, therefore, no necessity to raise the capital and make any further allotment, which should be set aside. Shri Mylsamy further pointed out that the second respondent was encumbering the properties belonging to the Company in favour of third parties for availing facilities for his own company, M/s Archana Spinners Private Limited from time to time without approval of the petitioners and without any benefit whatsoever to the Company. The second respondent, during his tenure as the Managing Director, has acted in violation of the provisions of the Central Excise Act. The second respondent had never placed the accounts of the Company before the shareholders. He has been indulging in malpractices and diverted the Company's funds for allotting shares to himself and his associates in other companies. The acts of the respondents are detrimental to the interests of the Company. Shri Mylsamy, therefore, prayed for the reliefs sought in the petition.
4. Shri C. Harikrishnan, Senior Advocate appearing for the respondents while denying the charges levelled by the petitioners has submitted that the petitioners' main grievances are that the respondent have failed to convene and hold Board meetings as well as general meetings of the Company. He further pointed out that the alleged main acts of oppression are (i) cessation of directorship of the petitioners for not attending the Board meeting consecutively three times thereby earning disqualification under Section 283(1)(g) of the Act; (ii) illegal appointment of directors (iii) allotment of the impugned shares in favour of the respondents group thereby reducing the petitioners into a minority. The acts of mismanagement relate to furnishing the assets of the Company by way of security for the loan secured by third party company, wherein the second respondent is holding majority of the shares. According to the averments made at para (vi)(2)(5) of the petition, the Company is a family company, each member looking after one company separately in exclusion of the other family members and without interference by any of them. The petitioners were allotted shares out of sentimental reasons, though they had not contributed for the shares. The second respondent has been managing the affairs of the present company. In the process of running the various business, the petitioners as well as respondents have entered into a family arrangement in the year 1984 which according to the petitioners, the second respondent failed to implement the said family arrangement. He categorically stated that the first petitioner eliminated his other brothers from the business and that now attempting to eliminate sons of other brothers by resorting to the present Company Petition.
5. Shri Harikrishnan recapitulating in a nutshell the salient features of provisions of Section 397 has pointed out that the provisions of Section 397 would be attracted if the acts of parties would prejudice the public interest and cause oppression to any member. These two ingredients are essential to invoke any relief under Section 397. He further referred to the recent Apex Court judgment in Hanuman Prasad Bagri v. Bagri Cereals (P) Ltd. (2001) CLJ 392--to show that all the conditions of winding-up should be present, but at the same time the Company should not be wound-up, as it would adversely affect the interests of the members. The main object of Section 397 is that the Company should continue to exist and the matter complained of should be brought to end. According to Shri Harikrishnan, the facts and circumstances of the present case do not meet the requirements of Section 397. Shri Hraikrishnan relying upon the principles enunciated by the apex court in Needle Industries has submitted that acts of the Company, though illegal need not be struck down, especially when they are in the interest of the Company. He emphasized that all illegal acts need not be interfered by the CLB, while legal acts may amount to acts of oppression against minority of the shareholders. He further pointed out mere violation in isolation is not adequate to grant relief under Section 397. The pleadings are always essential which cannot be enlarged without stating in the petition. The allegations that the second respondent has not been holding Board meetings or general meetings and that the second respondent is not looking after the interests of shareholders do not amount to an act of oppression, especially when no prejudice has been caused to the shareholders on account of inaction on the part of the second respondent. The Registrar of Companies has neither initiated action for any violation. The petitioners have not been adversely affected on account of increase of paid up share capital or allotment of the impugned shares or co-option of the respondents as directors. The petitioners do not repose confidence upon the second respondent. The first petitioner had advised the second respondent by Annexure A-21 to close down the unit of the Company. The Company has been closed as early as in 1992 and there has been no income from the business of the Company. By virtue of closure of the Company, the liabilities of the members is minimized. According to Shri Harikrishnan in case of a family company, compliance with the provisions of the Companies Act can be ignored as has been held in Indag Guarantee Company Limited. Even if there are violations he emphasized that such violations can be ignored. All the correspondence relied by the petitioners show that the second respondent did not implement the oral arrangement entered between the family members. Many of the letters written by the first petitioners are in his personal capacity as father to the son and not as a shareholder. The first petitioner has asserted his position as father and not as a shareholder. He further pointed out that no other member as ever raised any objection against the second respondent. The letter dated 2.8.96 (Annexure R-36) brings out the real mind of the first petitioner. Even, according to the petitioners, no meetings were held for more than a decade, but at the same time no action was initiated by any member at any point of time for convening and holding of meetings. The first petitioner has always ensured that his words as father should be carried out by the second respondent, being the son. The petitioners neither evinced any interest in the business of the Company nor complained since 1992. None of the directors from the petitioners' group were attending the Board meetings on account of the huge liabilities incurred by the Company. On the other hand, the second respondent cleared all the liabilities of the company and saved the Company's assets. In the process, the second respondent was constrained to file civil suits against the first petitioner, which resulted in filing of the present Company Petition by the petitioners. In regard to encumbering the Company's immovable properties, he pointed out that it was resorted to by the Company to meet the expenses incurred in connection with the machinery of the Company, before which the alteration to Articles were duly approved by the Company Law Board and in this connection he placed reliance on Annexure R-7. Shri Harikrishnan pointed out that notices were sent by the Company by certificates of posting for the three Board meetings as borne out by Annexures R-5, R-6, R-9, R-10, R-12, R-13, R-15, R-16, R-19, R-20, R-22, R-23, R-26 & R-27 and that the notices cannot be concocted on all the occasions. In this connection, he relied upon AIR 1966 Calcutta--to show that one cannot doubt sending notices by certificate of posting on all five occasions. Relying on Paramanand Choudhary and Ors. v. Smt. Shukla Devi Mishra and Ors. (1990) CC Page 45, he pointed out that directors failing to attend three consecutive meetings ceased to be director. He further relied on Energy Tobacco to support his contention that when there are only two members in a Board meeting and when one is not attending, the other lone member can conduct the meeting. He also made a reference to Article 91 & 92 to support his view that the continuing director is empowered to co-opt directors. Accordingly, the second respondent co-opted the respondent 3 as Director of the Company. He, therefore, submitted that there is no illegality in appointing respondents 4 to 5 as directors. He further referred to the list of creditors signed by the second petitioner, which was given to the bank and the CLB in Section 17 proceedings (R-7 at Page 67). There is nothing illegal to pay the creditors in cash. These entries are not denied by the petitioners in their reply and all the accounts are audited by the Chartered Accountants. Shri Harikrishnan, while summing up his arguments has pointed out the circumstances enumerated by Palmer and Grover, where corporate veil of the legal entities has to be lifted to meet the ends of justice. Under Indian Law, corporate veil is to be lifted in appropriate cases. In the present petitions, (i.e.) CP No. 66, 67 & 68, the corporate bodies are family companies, with shareholders being partners in business and the CLB should apply liberally the just and equitable principles. The CLB should consider the disputes among the family members of different companies in various company petitions in entirety and order amicable division of properties among them to give a quietous to the disputes as has been held in (1997) 1 CLJ 268 (CLB)--Vijay Krishan Jaidka and Ors. v. Jaidka Motor Co. Ltd.
6. We have considered the pleadings and arguments of the learned Counsel for the petitioners as well as respondents. The question that arises for our consideration is whether the alleged acts of oppression and mismanagement in the affairs of the Company warrant interference of this Bench to grant the reliefs sought in the petition.
7. Though this petition was heard on 07.06.2001, we did not issue the order in view of pendency of a connected company petition in CP No. 3/2001. As CP No. 3/2001 has been finally heard now, the following order is made in this present petition.
8. Before considering the merits of the petition, it is relevant to observe that the petitioners and the respondents 2 to 5 are lineal descendents of the deceased M.R. Mannar Aiyah, for whose benefits, the Company was incorporated in the year 1971. The Company consists of the family members as shareholders indicating clearly that it is a family company to be managed for the benefit of all family members. The first petitioner and his son, the second respondent are the subscribers to the Memorandum and Articles of Association of the Company, who have been named under the Articles as the directors apart from two other family members. The second respondent has been in control of the Company as its Managing Director. At present the Company is not carrying any activity. The present petition is on account of the differences which arose between the family members of the deceased M.R. Mannar Aiyah. Against this background, we proceed to consider the contentious issues raised by the parties.
9. The main acts of oppression and mismanagement are in relation to non-holding of Board meetings and general meetings, cessation of petitioners 1 & 2 as directors, illegal co-option of respondents 3 to 5 as directors, illegal allotment of the impugned shares, investment of funds of the Company and encumbering its assets without authority of the Board. The petitioners and respondents 2 to 5 are related to each other. The records produced before us reveal the following:
The first petitioner by a letter dated 11.11.1995 (Annexure A-2) addressed to the second respondent suggested that the activities of the Company must be discussed by the shareholders.
The letter dated 11.11.1995 (Annexure A-2) was followed by a reminder letter dated 16.2.1996 (Annexure A-3) requesting the second respondent to sort out the differences by mutual discussions and convene a meeting of the shareholders.
The first petitioner had sent letters on 25.02.1996 (Annexure A-4); 29.04.1996 (Annexure A-5); 16.06.1996 (Annexure A-6) and on 26.06.1996 (Annexure A-7) in regard to the convening of meeting of the shareholders of the Company.
The second respondent by a letter dated 03.07.1996 (Annexure A-8) stated that the annual general meeting of the Company for the year ended 31.03.1996 would he held in the first week of July or September 1996.
The first petitioner by a letter dated 16.07.1996 (Annexure A-10) complained with the second respondent that Board meetings of the Company or general meetings were not convened for more than a decade.
The first petitioner by a letter dated 24.05.1999 (Annexure A-18) requested the Company to send him certified copies of the minutes of all the general meetings and extraordinary general meetings of the Company held for the past six years from 1994 to 1999.
The second respondent by a letter dated 10.07.1996 (Annexure A-19) informed the first petitioner that he would make arrangements for auditing the accounts of the Company and that all problems be sorted out amicably and that Board meetings and general body meetings have been regularly held.
The second respondent by a letter dated 02.08.1996 (Annexure A-20) informed the first petitioner that a Board meeting of the Company would be convened in August 1996 and annual general meeting in September 1996.
The first petitioner by a letter dated 21.08.1996 (Annexure A-21) denied that Board meetings and general body meetings of the Company have been regularly conducted as reported in Annexure A-19 by second respondent.
The first petitioner by a letter dated 16.10.1996 (Annexure A-22) suggested to second respondent that discussions may be limited to the family members-shareholders to settle the disputes among themselves.
The petitioners had sent on 27.07.1996 telegrams and letters on 02.08.1996 (Annexure A-24) series) making requests to convene the Board meeting.
It is evident from the foregoing that the petitioners had been complaining about not holding the Board and general meetings for quite sometime. Against this background the plea of the respondents that the petitioners did not attend the Board meetings consecutively, thereby ceasing to be directors with effect from 21.02.1996; that the third respondent was co-opted as director on 21.02.1996; that respondents 4 & 5 were appointed as directors on 22.02.1996; that the impugned shares were allotted in the Board meetings held on 02.03.1996; 23.05.1996 and 24.05.1996 have to be seen. If we do so, then it is clear that all the above acts have taken place only to marginalize the parties. Mere production of certificates posting without any corroborated evidence such as the dispatch register or books of account to show the expenditure incurred in this behalf, cannot relied to support the claim of the respondents that Board meetings and general meetings were regularly held. Consequently, any resolution passed by the Board of directors after the induction of respondents 3 to 5 as directors cannot be valid. Moreover, the respondents have not produced any documentary proof of bringing additional funds for the impugned allotments and the actual utilization of the funds thereof. The impugned allotments in exclusion of the petitioner is oppressive. However, we do not propose to set aside the impugned allotments and other actions of the Board after a period of more than three years. The equitable remedy, in our view, in the present circumstances is that the petitioners must be allotted shares according to their entitlement. Accordingly, we hereby direct the Company shall allot additional shares to the petitioners in proportionate to their holding within 60 days and the petitioners will subscribe to the shares within 30 days of the offer made by the Company and for this purpose, if the authorized capital needs to be increased, may be accordingly increased. Thereafter the Company will convene and hold a meeting of the shareholders for the appointment of directors and vest with the Board of Directors the day-to-day management of the Company and the Board shall take such action as may be deemed fit in the interest of the Company and its members.
10. With the above directions, the petition stands disposed of without however any order as to cost.