Company Law Board
Shri Laxmi Narayan Rawat, Ms. Abha ... vs Rt Udyog Private Limited And Ors. on 2 December, 2004
Equivalent citations: [2005]127COMPCAS687(CLB), (2005)3COMPLJ342(CLB), [2005]60SCL173(CLB)
ORDER
S. Balasubramanian, Chairman
1. The petitioners claiming themselves to be entitled to 50% shares in M/S R.T. Udyog Private Limited (the company) have filed this petition under Sections 397/398 of the Companies Act, 1956 (the Act) alleging that with the view to reduce the petitioners group from 50% shareholders, further shares have been issued in the company and that the 1st petitioner, who was a promoter of the company has been unlawfully declared to have vacated his office of director in terms of Sections 283(1) (g) of the Act and that there have been misappropriation of funds in the company. With these allegations, they have sought for various reliefs inter alia including for a declaration that further issue of shares made on different dates as illegal, that the 1st petitioner continues as a director of the company and for a investigation into the affairs of the company etc.
2. Shri Choudhary, Sr. Advocate appearing for the petitioner submitted: The company was incorporated in 1990 with an authorized capital of Rs. 1 crore divided into 50,000 equity shares of Rs. 100/- each, 25000 redeemable cumulative preference shares of Rs. 100/- each and 25000 unclassified shares of Rs. 100/- each. The undisputed paid up capital was Rs. 25 lacs comprising of 25000 equity shares of Rs. 100/- each. Out of this capital, the petitioners' group(Rawat group) held 50% shares and Tibrewala group - respondents- held the balance 50% shares. The promoters of the company being the 1st petitioner and the 3rd respondent, were the first directors along with the 2nd respondent who was a professional manager. The company was incorporated as a joint venture partnership between the 1st petitioner and the 3rd respondent with an understanding that the company would be managed as a quasi partnership with joint management. The main business of the company was to set up a mini cement plant of 50 tonnes per day for which the company acquired land in RIICO Industrial Estate and a term loan of Rs. 90 lacs was sanctioned by RIICO in November, 1990. The 1st petitioner, the 2nd and 3rd respondents furnished personal guarantees in respect of the term loan. Certain shares belonging to the petitioner and respondents were pledged with RIICO. For the purposes of raising funds, both the groups transferred 15% shares held by each to one Ram Mohta - 17th respondent. As he evinced interest in investing further funds in the company provided he was also inducted as a director, he advanced a sum of Rs. 11 lacs to the company and was appointed as a director in May, 1991. However, after some time, he expressed his inability to continue with the company and as such his loan amount was refunded and he also transferred to the petitioner and respondents 15% each of the shares that had been earlier transferred to him. Thus, the original shareholding of 50% each of the petitioners and the respondents got restored. However in late 1992, Tibrewala group started acting against the interests of the petitioner's group and no notice for any Board meeting was sent to the 1st petitioner thereafter. Suddenly by a letter dated 1st January, 1993 (Annexure A-29), the 1st petitioner was informed that he had ceased to be a director in terms of Section 283(1)(g) of the Act as he had failed to attend 3 consecutive Board meetings or all meetings for a continuous period of 3 months. It is inconceivable that the 1st petitioner controlling 50% shares in the company and who had been attending all Board meetings up to 22.8.1992 would have absented himself if he had been issued notices for Board meetings. In November, 1992, the erstwhile auditor of the company informed the petitioner that the company had issued further shares to the tune of Rs. 13.5 lacs and that 4th respondent had been appointed as a non rotational director of the company. The allotment of shares was made only with the sole object of disturbing the equality in the shareholding and also for the purpose of gaining majority by Tibrewala group. In the same way by appointing the 4th respondent as a director, the equality in the Board had also been disturbed. On coming to know of the allotment of shares and appointment of a new director, the 1st petitioner wrote to the Managing Director, RIICO complaining about the attempt of the Tibrewala group to gain control of the company in exclusion of the petitioners. Thereafter, the 1st petitioner convened a Board meeting on 18.11.1992 at the office of RIICO to discuss the details of the functioning of the company with due notice to other directors viz. respondents 2 to 4 and 17. None of them attended the meeting. Another meeting was convened by the petitioner on 30th Nov. 1992 at the office of RIICO. In the meanwhile, one Shri Ashoke Dugar purportedly representing respondents 3 to 5 informed the 1st petitioner that there could be an amicable settlement between the parties. Accordingly, the petitioner sent a draft of terms of settlement to Shri Ashoke Dugar. However, instead of reacting to the terms of settlement proposed by the 1st petitioner, the respondents' group sent another draft containing terms which were not agreeable to the 1st petitioner and as such no settlement was possible.
3. The learned counsel further submitted: The company had allotted "13500 shares on 17.10.1992 (Return of Allotment was filed on 19.1.1993) and further 11500 shares on 12.11.1990. By these allotments, outsiders were brought in as shareholders in breach of the principles of quasi partnership. The respondents 8 to 14 are outsiders. No notice for the Board Meetings in which decisions to allot shares was taken was received by the petitioner. It is quite possible that no Board Meeting was held on these dates allotting shares as the Returns of Allotment had been filed belatedly after records had been manipulated to show as if Board Meetings were held and shares were allotted. It is on record that Form No. 32 was filed indicating the resignation of 3 directors on 17.10.1992. Thereafter, only the 2nd respondent and 1st petitioner continued as directors and no board meeting could have been held without the presence of the 1st petitioner. Any record showing the presence of the petitioner in the alleged meetings in which shares were allotted are all fabricated as the 1st petitioner would have never agreed to dilute his group's shareholding. It is on record that the 1st petitioner has given his personal guarantee to RICCO and has also pledged his shares with RICCO. Any disturbance in the equality of shareholding is a grave act of oppression and therefore the allotment purportedly made on 17.10.1992 and 12.11.1992 should be declared as invalid. Further, in a company in the guise of a quasi partnership, every partner has a right to remain on the Board. Without giving any notice for the Board Meetings, the respondents have declared that the 1st petitioner had ceased to be a director on the Board effective from 1st January, 1993. The letter dated 1st January, 1993 communicating the same (Annexure A-29) has been signed by the 4th respondent as Chairman while he had already resigned as a director on 17.10.1992 as per Form No. 32 at Annexure --10. Further, no details have been given regarding the dates of the meetings which the 1st petitioner had failed to attend, no proof of any notice for any Board Meeting having been sent to the 1st petitioner. All these would indicate that there is absolutely no justification for the respondents to that the 1st petitioner had vacated his office as a director. Therefore, the 1st petitioner should be restored as a director of the company.
4. The learned counsel further submitted: The 2nd to 5th respondents are guilty of various acts of mismanagement and siphoning of funds. Since the company had failed to repay the loans taken from RICCO, it took control of the unit in terms of Section 30 of the State Financial Corporation Act and auctioned the unit. The 1st petitioner has now taken over the unit for a total consideration of Rs. 1 52 lacs in the name of Gauri Cements.
5. The learned counsel for the respondents submitted; The petition is not maintainable, as, in terms of Sections 397/398, the acts complained of should continue till the date of the petition. All the allegations made by the petitioners relate to the period up to December, 1992 while the petition was filed only on 4.8.1993 that too after the 1st petitioner had taken over the factory of the company in an auction. Even though the petitioner and the 3rd respondent invested money equally in the project initially, yet, the petitioner was not willing to invest further funds. Since the project needed money, further shares had to be issued to whoever was willing to invest. There was no understanding or agreement that equality in the shareholding would be continued for ever. When Mr. Mohta was inducted as a shareholder, the equality was disturbed without any compliant from the petitioner. In so far as allotments of further shares are concerned, the relevant returns were filed with the ROC in time but the ROC took the returns on record belatedly and as such the question of fabrication of records does not arise. The Form No. 32 at Annexure -10 is a fabricated document. On 17.10.1992, only one director had resigned and not 3 directors as indicated in Form No. 32. On a complaint by the respondents, the ROC conducted an investigation and deleted two names from that Form No. 32. 4th respondent had not resigned on that date. It is the 1st petitioner who had acted not only against the interest of the company but also in breach of his fiduciary duties by instigating RICCO to take control of the factory even though no dues were payable to RICCO. Thereafter, the 1st petitioner himself took over the factory in the auction conducted by RICCO. Presently, after the factory was taken over by the 1st petitioner through RICCO, the company has no business other than recovering money payable by RICCO out of the auction proceeds less the company's dues to RICCO However, the petitioner, with a view to avoid payment of money by Gauri Cements to RICCO, which in turn would have paid money to the company after adjusting its dues, has filed a civil suit for restraining RICCO from recovering dues from Gauri Cement and has obtained a interim restraint order. As on date, not even a single pie has been paid to the company by RICCO on account of non payment of the auction amount along with interest by Gaud Cement to RICCO. If the petitioner were to be taken on management as a director, it would be completely against the interest of the company as he would ensure that Gauri Cement docs not clear its dues to the RICCO.
6. The learned counsel further submitted: Further issue of shares was not with a view to either reduce the petitioner to a minority shareholder or to create a new majority. Company needed funds and that is the reason why further shares were issued. The original project cost was Rs. 170 lacs but RICCO reduced to the same to Rs. 121 lacs out of which it was to fund Rs. 90 lacs but till May, 1992 it had disbursed only Rs. 74 lacs stipulating that the balance money had to be provided by the promoters. The petitioner did not want to invest further funds with a view to starve the project so that he could take over the company. That is the reason why he wrote a letter dated 2nd November, 1992 (Annexure A-11) to RICCO making complaints against the respondents. However, he did not endorse a copy of the same to the respondents. The respondents' group had to necessarily induct further funds and the project commenced 3 month ahead of schedule because of the funds invested by the respondents. Yet with a view to ensure that the petitioner's group and the respondents' group held 50% shares each in the company, the respondents gave a proposal to RICCO by a letter dated 4.1.1993 by which the petitioners were required to invest Rs. 9 lacs in the shares and also to convert their unsecured loan of Rs. 17 lacs as share capital. If they had done so, they would be holding 50% shares in the company now. Instead of accepting the offer, the petitioner wrote a letter to RICCO on 8.1.1993 making all sorts of allegations against the respondents. Because of this, on the ground that there had been serious disputes and differences among the promoters, RICCO issued a notice on 1st Feb. 1993 recalling the entire loan of Rs. 74 lacs with 19.25% interest totaling to about Rs. 82 lacs and demanded payment within 15 days. In the notice it was also stated that in case the amount was not paid within 15 days, RICCO would take possession of the industrial unit and realize its dues by sale/mortgage of the assets of the unit. Since the company could not repay the amount, RICCO auctioned the unit and RICCC acespted the bid of Gauri Cements which is owned by the petitioner for a (sic) of Rs. 152 lacs and Gauri Cement took control of the unit after payment of 25% of the bid amount. The balance amount was to be paid in a period of 6 years in 20 quarterly installments with a moratorium period of one year. However, the petitioner did not make any further payment. Instead by a letter dated 8th March, 1995, the 1st petitioner wrote to RICCO seeking for adjustment of Rs. 29.95 lacs being the investment of his group in the company against the dues to RICCO on the ground that ultimately the petitioners would be receiving their investments back from the company and therefore there was no need for Gauri Cement to pay the amount to RICCO. He also filed a winding up petition before Rajasthan High Court seeking for repayment of Rs. 4.5 lacs given by him as unsecured loan, which was repaid to him thereafter. Thus, the present investment of the petitioner is only Rs. 25 lacs as against over Rs 50 lacs invested by the respondents' group. Therefore the question of treating the petitioners as 50% shareholders in the company does not arise. His main object of seeking 50% shares in the company, without any matching contribution, is only to get 50% of whatever amount is left with the company. The petitioner has already enriched himself to the tune of nearly Rs 20 lacs by taking over the unit of the company for Rs. 152 lacs as against the cost of the unit at Rs. 172 lacs. The petitioner is changing his stand from forum to forum. In the civil suit in Calcutta court, the petitioner claims that it has the jurisdiction while before this Board he claims that this Board has jurisdiction. The prayers in both the proceedings are more or less similar and therefore the petitioner cannot pursue parallel proceedings. In the said civil suit, the petitioner has claimed that he is a 50% shareholder and in the present proceedings, he is seeking for a similar declaration. By filing the suit, even though against RICCO, the petitioner has effectively blocked the company from taking any action to recover its dues from RICCO. In view of the civil suit, RICCO is not taking any action against Gauri Cement for recovery of its dues.
7. Summing up his argument the learned counsel submitted that the respondents have already filed an application under the provisions of Section 542 and 543 read with Schedule XI of the Act against the petitioner for his various acts of misfeasance against the company. Therefore, the 1st petitioner should be held guilty of knowingly and deliberately committing offence punishable under Sections 542/543 of the Act and appropriate action should be taken against him. The learned counsel cited a number of decisions on the proposition that a director who is guilty of breach of trust and misfeasance is liable to make good the loss caused to the company.
8. I have considered the pleadings and arguments of the counsel. The main complaints of the petitioner relate to his removal as a director, issue of further shares exclusive to the respondent's group and outsiders and siphoning of funds by the respondents. The main reliefs sought for by him are to put him back on the Board of the company and also for cancellation of further issue of shares so as to maintain his 50% shareholding in the company. From the facts of this case, it is apparent that the company was envisaged with equal shareholding and equal participation by Rawat Group and Tibrewala group. In a number of cases, this Board has held that when there is equal shareholding and equal participation in the management, any disturbance to the same could be considered to be act of oppression. But in the present case, the admitted position is that on 18th Feb, 1993, the petitioner had already filed a civil suit seeking for a declaration that he was a director and also for restraining the respondents from obstructing the petitioner from functioning as a director. The present petition before -this Board was filed only on 4.8.1993 i.e. nearly 6 months after filing of the civil suit which is still pending. Therefore, since the civil suit was filed prior in time to the filing of this petition, I am not adjudicating on the issue of directorship in the present proceedings, notwithstanding the fact the claim of the petitioner that his removal is a grave act of oppression and the contention of the respondents that putting the petitioner on the Board would be prejudicial to the interests of the company and leave this issue to be decided by the civil court.
9. As far as the allegation relating to further issue of shares is concerned, the admitted position is that before issue of further shares, the share capital of the company consisted of 25000 equity shares of Rs. 1007each of which the petitioner's group held 12500 shares and the respondents' group the balance 12500 shares. Thus, both the groups were holding 50% each. The company had issued 13500 shares on 17.10.1992 and 11500 shares on 12.11.1992 totaling to 25000 shares to respondents 6 to 16. By these further issues, the holding of the petitioner's group has been reduced to 25%. No offer to the petitioner's group was admittedly made and as I have earlier pointed out that in a closely held company, in the nature of quasi partnership, any disturbance in the shareholding is an act of oppression. However, it is a settled law that if shares are issued to meet the financial needs of the company, in doing so, even if one group is incidentally benefited, the other group cannot complain of oppression until and unless it is established that the sole motive for issue of shares was with a view to disturb the existing shareholding or there exists a special relationship. In the present case, the admitted fact is that the project had costed Rs. 172 lacs. Even though the petitioners have alleged siphoning of funds in the guise of project cost, no material to substantiate the said allegation has been made. It is on record that the 1st petitioner had offered Rs. 152 lacs for the unit in the auction signifying the fact that the project cost could not have been less than Rs.152 lacs. Since RICCO had funded the project only to the tune of Rs.74 lacs, naturally the promoters had to bring additional funds to complete the project which incidentally commenced production 3 months ahead of schedule. Thus, the need for funds to complete the project had been established. In view of the special relationship between the parties, the petitioners should have been offered proportionate shares which the respondents had not done. While the petitioners contend that they were willing to induct more funds, It is the contention of the respondents that the petitioners were not willing, Whatever may be the correct position, it is on record that the respondents had offered 50% shares to the petitioners in their letter to RICCO elated 4.1.93 but the petitioners did not accept the offer. The main object of a proceeding under Sections 397 is to put an end to the acts complained of. When the company was in need of funds and when the respondents had made an offer to restore the petitioners to 50% shares in the company on their investing further funds of Rs. 9 lacs and. conversion of their unsecured loans, the petitioners should have opted for the same if their concern was to have 50% shares in the company. If they had done so, the question of their complaining of oppression in this regard would not have arisen. Presently the company has no business other than realizing the surplus out of the money to be paid by M/S Gauri Cements to RICCO. During the hearing, the learned counsel for the petitioners urged that further issue of shares being a grave act of oppression against the petitioners, they should be treated as 50% shareholder in the company. This prayer appears to be obviously with a view to get 50% of whatever money is realized by the company from RICCO. Considering the fact that this petition was filed only after Gauri Cement had taken over the unit of the company and with the present prayers that the petitioners be treated as 50% shareholder, the petition appears to have been filed not with a view to get the grievances of the petitioners redressed but for a collateral purpose of enriching themselves at the cost of the respondents who had invested additional funds to complete the project ahead of time. It is on record that out of the total amount of Rs. 29.5 lacs invested by the petitioners both in the form of share capital and unsecured loans, they have already received Rs. 4.5 lacs in the winding up proceedings filed by them against the company and their present investment is only Rs. 25 lacs while that of the respondents' group was Rs.44.5 lacs. Further, as rightly pointed out by the learned counsel for the respondents, notwithstanding the fact of demanding a 50% status in the company and also the position of a director, the 1st petitioner has been acting against the interest of the company by not only failing to ensure payment of dues to RICCO by Gauri Cement, but he has also filed a civil suit restraining RICCO from recovering its dues from Gauri Cements, the surplus of which would ultimately go to the ' company. It is also seen that RICCO itself had taken a stand earlier that due to the differences among the promoters of the company, RICCO would not pay the surplus to the company till the disposal of the petition before this Board. In other words, the present proceeding also appears to have been filed with a view to block the company from receiving its legitimate dues from RICCO and with a view to protect the interest of Gauri Cement of which the 1st petitioner is a promoter and a major shareholder. The Company Law Board being a court of equity cannot come to the aid of a person who is acting against the interest of the company and who has filed this petition with an oblique motive. Therefore, the prayer that further issue of shares should be cancelled cannot be granted.
10. The learned counsel for the respondents urged for taking action against the 1st petitioner in terms of Sections 542/543 read with Schedule XI of the Act. The provisions of Section 542 would apply only in case of fraudulent conduct of business. The respondents have not furnished any material as to how the 1st petitioner had conducted the affairs of the company in a fraudulent manner. Even their allegation that the 1st petitioner had fraudulently taken over the control of the cement unit in collusion with RICCO had been negative by the Rajasthan High Court. Their allegation that either the 1st petitioner did not ensuring payment of dues to RICCO by Gauri Cement or that he has filed a civil suit for restraining RICCO from recovering its dues from Gaud Cement cannot be considered to be conducting the business of the company in a fraudulent manner to attract the provisions of Section 542 of the Act. Therefore, the said application of the respondents is dismissed.
11. The petition is disposed of in the above terms with no order as to cost.