Company Law Board
Mr. Arun Kumar Mohta And Smt. Sushila ... vs Ganesh Commercial Co. Ltd. And Ors. on 30 March, 2006
Equivalent citations: [2006]134COMPCAS500(CLB), (2006)6COMPLJ351(CLB)
ORDER
Vimla Yadav, Member
1. CP No. 64/2004 is under Section 397/398 of the Companies Act, 1956 in the matter of Ganesh Commercial Co. Ltd. and Ors. Through this petition the petitioners namely, Mr. Arun Kumar Mohta S/o Shriratan Mohta and Smt. Sushila Devi Mohta have challenged various acts of oppression and mismanagement on the part of the respondents. The petitioners have particularly challenged the appointment of respondent Nos. 3 to 6 on the Board of Company; unauthorized increase in the total issued share capital of the company by the respondents; allotment of 15000 shares in favour of respondent No. 2 apart from 50 shares each in the name of respondent Nos. 3 to 9; and the removal of petitioner No. 1 and other Director namely, Shri Yashovardhan Mohta from the Board of the company. M/s Ganesh Commercial Co. Ltd. is a public limited company incorporated in 1940 under the Indian Companies Act, 1913. This company is a closely held entity and is more in the nature of quasi-partnership. The company has its registered office at 18A Roopchand Rai Street, kolkata -7. The total authorized share capital of the company is 25 lakhs divided into 20000 equity shares of Rs. 100 each and 5000 preference shares of Rs. 100 each. The total issued and paid up share capital of the company is 11,00,000 divided into 11,000 equity shares of Rs. 100 each. The Board of the company comprised petitioner, his son, R-2 and a family friend Mr. M.L. Bhaia prior to the impugned alternations/additions. The company had set up its manufacturing units for nuts and bolts and rubber goods in a tenanted property belonging to the original promoters and directors of the company at Kolkata and had invested substantial funds in construction of factory sheds/godowns and other development of the said property. In the year 1999 the company suspended its manufacturing activities completely. The only asset of the company apart from their plant and machinery was their tenancy right in respect of their factory shed (which was also surrendered in 2000 to the legal heir of Shri Rattan Mohta) and tenancy right in respect of their godown in the ground floor and their office in the first floor of premises No. 18A, Roopchand Rai Street, Calcutta. The company is a tenant in the said property which is owned by Ganesh Exports and Imports Company, a partnership firm belonging to B.R. Mohta Group. Since R-2 was stationed at Kolkata, he was given the responsibility to look after the day to day affairs of the company with effect from Feb 2000 after the demise of late Shri Rattan Mohta. On 16.7.2001 the petitioners alongwith respondent No. 1 decided to enter into a family settlement in respect of the various family properties including the company. It has been alleged by the petitioners that respondent No. 2 took complete advantage of the physical absence of the petitioners from Kolkata. The respondents indulged in various acts of oppression and mismanagement.
2. On 11.10.2004 when this petition was mentioned before principal bench directions were given to maintain status quo in regard to the assets and shares of the company. On 15.10.2004 principal bench directed the Bench Officer Kolkata to authenticate the statutory records of the company from 2001 onwards. The company was directed to continue comply with the Bench's earlier order dated 11.10.2004. It was further ordered that there shall be no Board or General Meetings of the company.
3. During the hearing the counsel for the petitioners argued and also furnished written submissions contending therein that the respondents have indulged in various acts of oppression and mismanagement. It was pointed out that out of the total issued equity shares of 11000 petitioners have 5639 shares which amounts to 51.2% of the shareholding. Besides they also have additional support of 10.17% shares as owned by petitioner's son (500 shares) and his wife (619) shares. As against this the respondent No. 2 (brother of the petitioner No. 1) only had 550 shares prior to the impugned allotment. After the death of Rattan Mohta, petitioner No. 1 and Respondent No. 2) a family settlement which included the present company as well was arrived at on 16.7.2001, As per the family settlement respondent No. 2 was to get 31% of the entire assets of the respondent company. The company owed money an amounting to Rs. 9,81,514 to the petitioner and his family. This amount had to be deducted from the company's assets before its division. To get more than 31% of his share of assets in the company R-2 denied the said claim of the petitioner by creating fictitious liability of the company vis-a-vis himself. With this intention R-2 indulged in the following acts of oppression and mismanagement:
Important Dates Acts of oppression and mismanagement 14.08.2001 R-2 appointed R-3 as an additional director without any notice either to Mr. M.L. Bhaia or to petitioner No. 1 or his son namely, YashovardhanMohta, the other director of the company. No notice for the General Meeting for confirmation of the said appointment was given to any of the shareholders of the company 2001-2003 All the affairs of the company including the signing of the balance sheet for the period 2001 onwards were being done by R-2 and R-3.
6.4.2004 Petitioner received a letter from Mr. P.C. Aggarwala on advice of ofShri G.P. Birla (who mediated family settlement) alongwith a fictitious statement regarding the sale proceeds received from sale of plant and machinery of the respondent company in the year 2001 April, 2004 The petitioner discovered the following on inspecting Registrar of Company's records: a. R-3 appointed as Additional Director on 14.8.2001;(b) M.L Bhaia resigned as director on 13.11.2001;(c) various fictitious liabilities of the company created by showing loans from R-2 apart from fictitious expenses booked.
23.6.2004 The petitioner on examining the bank statement for the period 1.4.2000 to 31.3.2003 found refund of various cheques received from the buyers of the plant and machinery of respondent company July-Sep. 2004 Petitioner wrote several letters to the respondent protesting the illegal appointment of R-3 on the board as well as future notices of the board meeting and the general meeting.
18.9.2004 As the respondents remained indifferent, to protect the interest of the company as well as its majority shareholders the petitioner gave a public notice in the newspaper September, 2004 The petitioner once again inspected Registrar of Company's record and found that a general meeting of the company was held on 20.8.2004 wherein the following resolutions were passed:
a) Authorised share capital of the company increased by another 10,000 share (p.203, 208-213)
b) 15000 new shares allotted to respondent No. 2 and 50 shares each to respondent Nos. 3 to 9 (p.226-227)
c) New Directors (Respondent Nos. 5 and 6) appointed and one earlier Additional Director (R-4) confirmed (p.222.230)
d) Petitioner No. 1 and his son removed as Director (p.230)
e) Further instances of siphoning (p.238) Hence the petitioners insisted on their prayer seeking the following reliefs:
(i) Removal of R-3 from the Board of the respondent company
(ii) The respondents be directed to bring back the sale proceeds amount of Rs. 12 lakhs (Rs.13.82 lakhs received against which only Rs. 1.81 lakhs put in the company's account through cheque) in the coffers of the company.
(iii) The respondent be directed to bring back the total approx. amount of Rs. 41 lakhs misappropriated by the respondent from the funds of the respondent company by showing fictitious expenses and by creating fictitious liability of unsecured loan (Rs.20.53 lakhs till 31.3.2004) and Rs. 20.71 lakhs for accounting year 31.3.2004, which includes illegal right of Rs. 8.66 lakhs on unsecured loans lent by the petitioners and the beneficiary trust of the children of petitioner No. 1 to the company);
(iv) Set aside all the resolutions passed, as mentioned above, in the General Meeting of the company held on 20.8.2004.
4. As regards acts of oppression and mismanagement, counsel for the petitioner argued that respondent No. 2 appointed respondent No. 3 as an additional director on 14.8.2001(before the resignation of Mr. M.N. Bhaia on 13.11.2001) without giving any notice of the said Board Meeting to the petitioner or to his son and without any notice of the General Meeting to the petitioners or to his son and to his wife for the confirmation of the said appointment. The said appointment was illegal. The petitioner came to know of the said act only in April, 2004 on inspection of Registrar of Companies record after receiving a letter dated 6.4.2004 from Mr. P. Agarwala (on advice of one Shri G.P. Birla - who mediated family settlement). This appointment was done with the sole intention of having the necessary quorum to undertake various activities on behalf of the Board at the back of the petitioners. This fact is borne out from the signatures of respondent No. 2 and 3 on all the subsequent annual returns and balance sheets from 2001 onwards. It was pointed out that the respondents have not advanced any arguments in the course of oral submission defending their present illegal action. They have not confronted any of the aforesaid evidence produced by the petitioner including the affidavit of Mr. M.L. Bhaia. Instead, after finishing their oral submissions the respondents sought to bring certain additional documents on record in form of certain alleged notices of Board Meeting and General Meeting which were shown to have been sent at Kolkata address of the petitioners. The petitioners objected to this as the respondent had not sought this Bench's permission to file these documents which were sought to be filed after a gap of almost one and a half years of having filed the reply. It was argued that without prejudice to the above the said notices which were sought to be brought on record on the face of it showed manipulation on the part of the respondents as not only the said notices showed Kolkata address (when it was in the knowledge of the respondents that the petitioners stay at Delhi) but also the persons shown to have received these purported notices was somebody whom petitioners do not even know. It was further argued that the respondent No. 2 with the help of respondent No. 3 not only created fictitious liability on the company by showing loan from respondent No. 2 but also created fictitious expenses so as to siphon the money. Despite the fact that the company was doing no business legal expenses of Rs. 16,270; 3,72,000 and advance of Rs. 1 lakh were shown to have been incurred for the year ending 2001-2002. Besides, apart from accountant charges amounting to Rs. 77,000 for each year, travelling expenses of Rs. 79,222: (FY 01): Rs. 85,314 (FY 02:) Rs. 5,72,119/-(FY 03); were shown to have been incurred. Further, R-2 had shown fictitious loan amounting to Rs. 5,87,000/- and unsecured loans amounting to Rs. 58,000/-. It was pointed out that the respondents as per their reply affidavit have sought to justify the said expenses on certain accounts, but in the course of their oral submissions they have not referred to any such justification. Instead they have raised a new defence namely, that the said accounts were audited and, therefore, cannot be challenged. Further, the petitioner pointed out to the various acts of siphoning/misappropriating the sale proceeds of the plant and machinery of respondent company sold by respondent No. 2. Reference was made to letter dated 6.4.2004 which had a statement given by R-2 himself showing that out of the total sale proceeds of Rs. 13.82 lakhs cheque amounting of only Rs,.1.81 lakhs was received and the balance Rs. 12 lakhs was received in cash only. The petitioner also referred to the bank statement annexed at pages 171-181 to the petition showing refund of various cheque amounts received from the buyers of the said plant and machinery. It was pointed out that the respondent had reversed substantial amount of the aforesaid sale in the books of the company by refunding part of the amount by various purchases and canceling the original sale bills and thereafter issuing fresh bills only to the sum of Rs. 1.81 lakhs. . It was vehemently argued that the respondents contention that the amounts shown in the bank statement like Rs. 1.08 lakhs: Rs. 2.28 lakhs: and Rs. 1.27 lakhs were advance deposits given by three parties which were subsequently refunded as they did not buy the entire machinery was misconceived. First of all, it was argued, earnest money deposited was not a condition of sale. In any event the explanation is incomprehensible as to why somebody should pay Rs. 1.08 lakhs: Rs. 2.28 lakhs: and Rs. 1.27 lakhs as advance for machinery which fetched in totality a sum of Rs. 1.89 lakhs only. Further it was pointed out that the respondents had not taken this stand in the course of their oral submissions. Instead, they sought to dispute their statement regarding the factum of siphoning by producing another chart. The petitioner objected to the production of the said chart particularly because the respondent had not denied the said statement annexed to the petitioners' rejoinder which was filed almost a year back and also because the said statement was only sought to be produced after the respondent had finished their oral submissions. It was emphasized that the statement annexed to the petitioners rejoinder remained unrebutted and, therefore, the said factum of siphoning stands proved on this account as well. Furthermore, the counsel or the petitioner argued, that the resolutions passed in the general meeting of 20.8.2004 increasing the authorized share capital and allotment of shares were illegal and amounted to acts of oppression. The company sought to increase the authorized share capital by 10,000 shares and thereafter allotting 15,000 shares to R-2 and 50 shares each to R-2 to 9, This resolution removed petitioner and his son as director and inducted R-5 and 6 as new directors and further confirmed appointment of R-4 as Additional Director appointed on 26.3.2004. No notice of the said General Meeting was given to the petitioners or the son and the wife of petitioner No. l. No offer was given to the petitioners or the son and the wife of the petitioner No. 1 regarding allotment of right shares of 15,350. The said increase of authorized share capital for the subsequent allotment it was argued was not for the benefit of the company as the company had admittedly shut its operation since 1999. There was also nothing to show that in fact any funds had come into the coffers of the company pursuant to the said purported allotment of right share issue worth Rs. 15,30,000. The real reason was to reduce the petitioners and his family who hold almost 61% of the total issued share capital into a minority so as R-2 could easily sell the tenancy right owned by the company to a third party. The counsel for the petitioner to substantiate his contention relied on the following two judgments:
1. Dale and Carrington v. P.K. Pratapan
2. Madhusudhanan and Anr. v. Kerala Kaumudi P. Ltd.
It was argued that it is a fit case for winding up but winding up order could have adverse impact on the rights of the petitioner. In case of winding up the petitioners would get less than what they are entitled to because of the fact of illegal reduction in their shareholding, and in the assets of the company; and illegal inflation in the liabilities of the company.
5. The counsel for the respondents argued and furnished written submissions contending therein that for any relief to be granted under Section 397 of the Companies Act, 1956 (the Act) the petitioners (P) have to make out a case that the facts constituting oppression make it just and equitable for the company to be wound up and that to wind up the company would unfairly prejudice the petitioner. Reference was made to
a) Section 397(2) of the Act;
b) 1965(2) SCR 720 at 733, Placetum © to (h), 734 Placetum (a) to (f);
c) 1981(3) SCR 698 at 744, Placetum (a) to (b);
d) 105 Company Cases 465 at 476, 477;
e) 2001(4) SCC 420 at Para -3, page 421 Placetum (do) to (f) and Para-12 at page-424
6. In the instant case, it was pointed out that it cannot be said that winding up of the company will prejudice the petitioners. This is so for the following reasons:
a. Respondent No. 2 was always in management of the company (Petition para 8.5, page-12, Clause(b) b. Family settlement of July 16, 2001 to which Petitioners are parties clearly shows that the petitioners want to sell off their shareholding in the company to outsiders for valuable consideration and want nothing to do with the company in future. (Petition, pages 80-83 at Clause-3, page 81) c. Petitioner No. 1 even today wants to abide by Clause-3 of the family settlement and is seeking to enforce his rights pursuant thereto.
(letter dated 29.10.2003 of P being Annexure R-4 to the Reply.) Significantly, this letter dated 29.10.2003, it was argued, has been suppressed in the petition.
Further it was submitted that petitioners have not attended any Board/General Meeting, have they made any enquiries as to whether the company is complying with its statutory obligations of holding Board meetings and General Meetings, P have not taken any step to explore avenues/opportunities that would keep the company alive. P have not put in any funds into the company for its continued existence.
The above facts clearly show that the petitioner are only interested in deriving money by sale of their shareholding in the company and are not interested to have any say and never had any say the management and affairs of the company and nor did they take any steps to ensure the continued existence of the company. In such circumstances, it cannot be said that winding up of the company will unfairly prejudice the petitioner. Reference was made to;
a) 105 Company Cases 465 at 473 to 478 and 482;
b) 2001(4) SCC 420 3 and 12, pages 421 and 424)
7. It was argued that the non re-election/removal of the petitioner No. 1 and his son as Directors of the company cannot form the subject matter of a complaint under Sections 397 and 398 of the Act, even if there are allegations of suppression of notice and illegalities. Illegality per se cannot be a ground for proceeding under Sections 397 and 398 of the Act. In such circumstances, the cessation of petitioners' Group of Directors and appointment of Respondents as Directors cannot constitute grounds for interference by this Hon'ble Board in the facts and circumstances of this case. Reference was made to:
a) 1981(3) SCR 698 at 746, Placetum (a) to (h);
b) 105 Company Cases 465 at 485 (last para), at page 486 (first three paragraphs)
8. In any event, it was pointed out that, notices of all Board meetings and General meetings were given to the petitioner No. 1 at their registered address in India as per past practice. In spite of the same, petitioner did not attend Board meetings and evinced total disinterest in the affairs of the company. As such, it cannot be said that there was any suppression of notice from the petition. In fact, by not attending Board meetings, petitioners group of directors are deemed to have vacated their offices as Directors of the company. (Section 283(1)(g) of the Act.)
9. It was further argued that the petitioners have not come with clean hands and have acted prejudicially to the interest of the company and R as will be evident from the following:
a. Petitioners have not paid compensation as per Clause 3 of Settlement dated 16.7.2001 (Petition, pages 80-83 at page 81 and reply, Anne-R-6.) b. Petitioners have handed over possession of the factory land referred to in Clause 3 of the Settlement to a third party without making payment of compensation and thereby sought to deprive the company of its tenancy in respect of the said portion.
c. Petitioners have not paid R-4 her dues under the settlement.
(See: petition, pages 80-83 at Clauses 4.1 and 4.2, pages 81 and 82; MOU dated 15.10.2003, Annexure R-2, Clause 7 and 8, Clauses (frivolous) and (g) and last page of the document).
The same will show that postdated cheques have also been issued in favour of respondent No. 4. However, such cheques issued by the petitioners have been dishonored for which proceedings under Section 138 of the Negotiable Instruments Act are pending.
d. Petitioners have, it was pointed out, sold Faridabad Unit of company but had not remitted the entire sale proceeds for which a claim has been made by the respondent No. 2. Such claim has been lodged with G.P. Birla who was appointed Arbitrator under the MOU dated 15th Oct. 2003. (the claim lodged by R-2, Sur rejoinder annexure G. pages 62 to 70). In fact the fabricated list of claims relied upon by the petitioner also shows that petitioners have not remitted entire sale proceeds of Faridabad Unit. (Rejoinder Annexure-A, pages 34 and 35 at page 35, Item -6). e. Petitioners instead have sought to resile from MOU dated 15thOct, 2003 by reason of the following.
(i) Petitioners have sought to file partition suit in respect of property at Kolkata being premises No. 22, Belvedere Road, Kolkata, The said property was the subject matter of MOU dated 15thOctober 2003, which provided that the sale proceeds of the same were to be utilized to settle accounts between the parties. (Reply annexure R-2, Clause -9 and Clause (d)
(ii) Petitioner No. 1 has caused petitioner No. 2 to institute proceedings before the Civil Judge in Bikaner challenging the MOU dated 15.10.2003.
(iii) Petitioners through their Advocates have sought to resile from MOU under cover of letter dated April 20,2004 by making false allegations. (See. Reply Annexure R-3).
10. It was further argued that in making an application under Sections 397 and 398 of the Act, petitioners have invoked the equitable jurisdiction of this Hon'ble Board. The above facts show that petitioners have not come with clean hands and have acted to the prejudice of the Company. In such circumstances, Petitioners are not entitled to any relief Reference was made to:
(i) 1981(3) SCR 698 at 759, Placetum (g) and (h); and page 762, placetum (g) and (h).
(ii) Unreported judgment of the Calcutta High Court dated 31st March, 2005 (Re: Ruby General Hospital Ltd.) at page 36)
11. It was pointed out that the petitioners also cannot complain with regard to the further issue and allotment of shares in the Company for the following reasons:
a. Petitioners have by their conduct clearly evinced an intention not to make any further investment in the company and is only interested in realizing the value of their investment;
b. Petitioners have not taken any steps to fund the Company for its continued existence;
c. Inspite of being offered shares, petitioners have refused to subscribe to shares. Letter of offer was sent to Petitioner's registered address as registered with the company. (Sur rejoinder, paragraph 4 page 3) d. Funds were required by the company to meet its running expenses for the purpose of complying with its statutory obligations and carrying out audit;
12. It was argued that No objection can be taken with regard to the accounts of the company as the accounts have been duly audited and there is no charge against the auditors and auditors are not even parties to this proceeding. Further, the list relied upon in the rejoinder by petitioner is a fabricated list as will be evident from annexures to Sur Rejoinder (Sur rejoinder Annexure "G" pages 62-79).
10. The company was the subject matter of the family settlement of 16thJuly, 2003. The petitioners, it was argued, cannot seek to enforce rights in relation to the company without complying with its own obligations under the family settlement as petitioners are seeking to do in the instant proceeding. All matters need to be resolved together and not piece meal. As such, issues relating to affairs of Company ought not to be decided in proceedings under Sections 397 and 398 of the Act.
13. The counsel for the petitioners argued that the respondents had only raised certain technical arguments in the course of their oral submissions. Petitioner's case was presented as under:
" Respondent's defence Petitioners contentions
1. Petitioner's entire case is for price of their shares in Respondent Company (showed family settlement - Clause 2(b), 3), letter of petitioner dated 29.10.2003 (R-4) seeking to enforce the said clauses of family settlement.
The petitioner wants the company to be sold. No steps taken to keep the company alive.
Hence, no case of winding up on just and equitable ground made out. In any event no ease made out that winding up would unfairly prejudice the Petitioners. Hence, the present petition is not maintainable.
105 CC 465 (473, 474, 482), as affirmed by Supreme Court in 105 CC 493 (para3, 12) - here also the petitioner was asking for money alone. Also relies upon Kalyani Tube -19652 SCR 720 (733), Needle Industry - 19833 SCR 698 (746/7) for the same proposition.
1. Petitioners' case is not at all based on family settlement.
In fact, their case is de-hors family settlement. No argument has been raised based on family settlement, much less for enforcement of Clause 2(b) or 3. On the contrary, it is the Respondent who are trying to over reach/circumvent the said family settlement through the present illegal actions. Hence, the judgment of Bagri Cereals - 105 CC 465 is clearly inapplicable to the facts of the present case.
In any event, the scope of Section 397, 398 is completely different from that of the family settlement as in the formal it is the right of the petitioner as a shareholder and the internal affairs of the company which is in issue, whereas, family settlement deals with rights of various members of the family in diverse properties of the family including the company.
CLB can pass orders under Section 397 and 398 even if circumstances for winding petition not exist. (see20044 CLJ310 (All)(para35-36). In case impugned action is for incorrect share allotment by inter alia ignoring the articles, removal of Directors, appointing new Directors, these instances by themselves are sufficient circumstances to fully justify that a case of winding petition on just and equitable ground made out. (see98 CC 575 (596-9). The said judgment have been affirmed by the High Court in 19944 CLJ474 (490), wherein the High Court also additionally holds that if actions contrary to understanding, just and equitable ground for winding up made out.
Also see 19984CLJ25 (paras30,32) -if provision of the Act ignored, then just and equitable ground to wind up made out.
That apart, the winding up order would clearly prejudice the petitioner as it would have adverse impact on the rights of the petitioner as they will get less than what they are rightfully entitled to given the fact that their shareholding have been reduced illegally, assets of the company reduced and liabilities of the company inflated.
If sufficient relief is available, (which in the present case is very much there), there is no need to resort to winding up -59 CC 969 (975)
2. The petitioner have not approached CLB with clean hands and therefore the discretionary relief under Section 397 and 398 shall not be granted. (Relies upon Needle Industries -19813 SCR 698 (75,762).
Instances of unclean hands:
(a) Shows letter dated 6.2.2000 (R-6), that Petitioner has not paid compensation under Clause 3 of the family settlement.
(b) Shows 6.4.2002 letter (p. 30 at 35) to contend that Petitioner has not paid the balance Rs. 60lacs out of the sale proceed of rubber factory.
(c) The various obligation of the petitioner in terms of MOA (Annexure R-2) have not been complied with by the petitioner.
2. The instances of unclean hands has to be with respect to the affairs of the company and not unconnected with the same. Even in the Needle Industries case, the action of the petitioner was not above board in so far as acquisition of the shares of the company was concerned.
Even otherwise, the instances of unclean hands are unfounded, as;
(a) The petitioner has denied the said allegation (see petition - 13/14 of rejoinder). No such determination has been done as yet.
In any event, this is an aspect on which parties have joined issues and the same has to be settled by the process of mediation as stipulated in the family settlement. That apart, the present instance does not show the role of petitioner either as shareholder or Director in the company but as a debtor/creditor of the company. Hence, irrelevant for the purpose of a petition under Section 397/398.
(b) Respondents are taking conflicting stand on the said issue. While at one place they are alleging that the same proceedings was Rs. 1.22crores (para27-reply), at other place they are alleging the same to be Rs. 71lacs.
(p.35/rejoinder).
In fact, the total sale proceeds was merely Rs. 17.20lacs (see para8.11 and 8.12 of petition, para23 of rejoinder) and the same was approved and recorded in the Board Resolution dated 25.3.1996 in both of which respondent No. 2 was present. In fact, the present matter is more than 10 years old and also the respondent are seeking to rake the said issue not only to divert the attention of this Hon'bleBoard from the real issue in question but also the said allegation completely overlooked the fact that the said amount is exactly the amount mentioned in the company" books of accounts as well which has not been challenged ever or even now.
(c) The issue relating to MoA dated 15.10.2003 is sub judice in Civil Court at Bikaner.
Also in the said context, kindly see Annexure A-3, i.e. the petitioner's reply.
3. Various instances of inflated expenditure cannot be looked into as the balance sheet showing the said expenditure has been audited. Moreover, auditor has not been made a party.
3. Once the details have been provided, then even if balance sheet has been audited without any adverse comment will not make any difference.
(se96 CC 493 (501).
Even if mis-appropriation of funds is not shown then also relief granted (see 19984 CLJ252 (para32).
The auditors can only-see whether the document showing expenditure are in order, they cannot look into the fact whether the said expenditure incurred were in fact on account of the company or personal expenses. In any event, the bank statement, being an independent undisputed document shows that the auditors had not examined the various expenses appropriately.
4. That the issue of removal of directorship cannot be gone into in a Section 397/398 petition. The said grievance can only be agitated in a suit.
Relies upon the judgment of the Calcutta High Court in Bagree Cereals -105 CC 465 (485/6).
4. The said objection as well as the judgment of the Calcutta High Court is clearly inapplicable in the present case. This is because it is a well settled legal position that in case of a family company/quasi partnership, the said Rule as laid down in Bagree Cereals case does not apply. In company of such nature like the present company, the issue of removal of directorship can be gone into in a 397/398 petition.
19971 CLJ268 (para44-47), Gurmeet Singh v. Polymer Papers CP No. 28 of 2002 (para20)
5. Prayers (a) to (1) are stand alone payers of declaration without any consequential relief. Therefore, cannot he granted.
5. The said prayers are both for declaration as well as for consequential reliefs.
14. I have considered the pleadings and arguments of the counsels for the petitioners and the respondents. Petitioners' case is that of "oppression" and "mismanagement". Increasing of authorized share capital and allotment of additional shares is alleged to be malafide besides not being in the interest of the company and being in violation of the proper and legal procedure prescribed. By manipulating the allotment of shares; by removal of petitioners from the Directorship; by appointing new directors the respondents gained control of company and siphoned off funds. According to the petitioner though this is a fit case for winding up, the winding up order would clearly prejudice the interests of the petitioners because of the fact of illegal reduction in their shareholdings and in the assets of the company and because of bogus inflation in the company's liabilities. Respondents' case is that petitioners' entire case is for price of their shares; the petitioners have not come with clean hands - have resiled from family settlement dated 16.7.200 land MOA dated 15.10.2003; removal of the petitioner-1 and his son from Directorship cannot form the subject matter of a complaint under Sections 397 and 398 of the Act; no case has been made out for winding up; and alternatively R-2 is willing to purchase their shareholding to bring to an end the matters complained of.
15. On consideration of the facts and circumstances of the case, I find that the Respondents have failed to refute the allegations against them. As regards respondents' reliance on the decision of the Supreme Court in Bagree's case (Hanuman Prasad Bagree Cereals P. Ltd (2001) 2 Comp LJ 392 (SC) to submit that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds, and that such winding up would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, alter observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ).
Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up petition on just and equitable grounds, no relief could be granted to the petitioners.
It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit, and this would not justify winding up on just and equitable grounds. Normally, as a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by this Board in Section 397/398 proceedings. In the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of majority into minority. Further, when the promoter having high stake in the company complaints of his exclusion from the management, f feel that equity demands that his complaint should be inquired into in the present proceedings. However, in the present ease, the claims of the petitioners are of their claim of quasi-partnership and by denying the petitioners a representation on the Board, they are being oppressed by the majority shareholders. In case of dissolution of a partnership, the just and equitable grounds are wider than the just and equitable grounds applicable in the case of winding up of a company. Similar objection was examined by this Board in Anupar Chemicals case (Dipik G. Mehta v. Shree Anupar Chemicals P. Ltd. (1999) 2 Comp LJ 539 CLB), Supra, as follows (para 30 at pages 555 and 556 of Comp. LJ) -
The learned Counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on just and equitable grounds. He also relied on the judgment of Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on just and equitable grounds. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding on just and equitable grounds, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition first, one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on "the facts of a case. Since Section 397/398, proceedings are alternative to a winding up proceedings, it is not that only those in which are considered to be just and equitable in a winding up proceedings to be the grounds in a Section 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be would up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Cooperative Wholesale Society (1954) Scottish Cas 381 - referred to in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SUPREME COURT) : (1981) 51 Comp Cas 743 (SUPREME COURT), wherein it was held -
Although the words, 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order...but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be opened to the minority shareholders with a view to bring to an end the oppressive conduct on the minority.
In the present case, the petitioners have established oppression and since the principles of partnership are applied in this case, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership and, therefore, the company could be wound up on just and equitable grounds. In the present case winding up of the company would not be in the interest of the company and the shareholders. However, proceedings under Sections 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members. Therefore, the prayer of the petitioners for a representation on the Board deserves to he granted.
16. Next, it has been contended that in a proceeding under Section 397/398, the petitioner should come with clean hands failing which he should he denied relief. Bench's attention was invited to a letter dated 6.2.2000 pointing out that the petitioner had not paid compensation under Clause 3 of the family settlement and that the sale proceeds of rubber factory were not paid and further that various obligations of MOA dated 15.10.2003 were not complied with. The counsel for the petitioner contended that the instances of unclean hands have to be with respect to the affairs of the company and even otherwise the instances of unclean hand are unfounded. I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Gas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd (44 CC 390) the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "... the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands..." I am inclined to agree with the counsel for the petitioner. The instances of unclean hands have to be with respect to the affairs of the company. In the present case the instances pointed out are not in the affairs of the company. Family settlement is a different matter, petitioners emphatically dehor family settlement. Even otherwise, the instances of unclean hands are unfounded. Further, one such instance refers to a letter dated 6.2.2000 which is even prior to the filing of this petition. Hence, the respondents case on this count fails.
17. As regards increase in the share capital of the company, the respondents have not been able to prove the necessity of such increase. The facts of this case do not warrant such increase. The company had suspended all manufacturing activities since 1999. Nothing was placed on record to show the need of the company for further investment and hence need for allotment of additional shares. In view of the doctrine of "proper purpose", it follows that in the matter of issue of shares, Directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. In Needle Industries case the Supreme Court referred to some old English decision with approval. Punt v. Symons was quoted at SCC p.394, para 105 in which it was held:
Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the voles of the new shareholders were to have been used.
Piercy v. S. Mills and Co. Ltd. applied the same principle while holding: All ER p.316 E-E. The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.
The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was clone with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, the respondents relied on certain certificates of posting issued by the postal authorities. I have not felt safe to decide the controversy of service of notice on the basis of the certificates. Firstly, these are not admissible as pointed out by the petitioner as the same were not filed by the respondents along with the reply which was filed almost one and half years back and further that no leave/permission had been sought to bring it on record at the time of argument. It was pointed out that the notices show Calcutta address when it was always in the knowledge of the respondents that the petitioners stay in Delhi and that the person so receiving the said purported notices is somebody whom the petitioners do not even know. Secondly, it is not difficult to get such postal seals at any point of time. Onus to prove posting of notices of meetings rests with sender who has to establish posting by sufficient corroborative evidence. Mere production of the certificates of posting issued by the postal authorities would not be a conclusive proof of having served the communication upon the addressees. The onus to prove that notices were sent is on the company, which onus, the company has not discharged. The respondents' further contention that the petitioners vacated their office by operation of law provided in Section 283(1)(g) fails in view of non service of proper notice. Any omission to serve a special notice on the directors sought to be removed constitutes denial of their statutory right of reply and the absence of such notice to the directors, any resolution for their removal would be vitiated by such omission. I do not see any other material substantiating the fulfillment of the requirements of Sections 284 and 190 before removing petitioners from the post of Directors. Moreover, the first petitioner is one of the promoter director of the company. Under these circumstances, the resolution passed, even if it were perfectly legal, yet would be oppressive, warranting appropriate reliefs.
18. Next, the petitioner have alleged financial mismanagement in the company resulting in siphoning off funds and creating of fictitious liabilities. To the specific instances brought to the notice of this Bench as mentioned above the respondents while in their reply affidavit have sought to justify the said expenses, no such justification has been referred to in the oral submissions. Instead, their new defence was that the accounts were audited and, therefore, cannot be challenged. I find no merit in this argument. The bank statement at pages 171 to 181 of the petition showed refund of various cheques received from the proposed buyers of plant and machinery. Earnest money shown to have been received by way of cheque and the balance amounting to Rs. 12 lakhs was received in cash (as per respondents' own statement--letter dated 6.4.2004). It is unconvincing. R-2, manipulated this by reversing substantial amount of earnest money by refunding part of the amount of various purchasers and cancelling the original sale bills and thereafter issuing fresh bills only to the sum of Rs. 1.81 lakhs. No justification has been provided for this. And now it is argued that the accounts are audited and hence, unassailable. There is no explanation for other inflated expenses mentioned above. In view of the foregoing, the factum of siphoning off of funds stands proved.
19. Further, issue of additional shares in violation of the proper and legal procedure prescribed was already an act of oppression on the part of the respondents and to top it with effort to take advantage of their wrong, the respondents have made an alternative plea to give the option to buy the petitioners' shareholding. Granting such a request would amount to awarding the wrongdoer and penalizing the oppressed party. In the circumstances of this case, asking the oppressed to sell his share to the oppressor not only fails to redress the wrong done to the oppressed but would also result in heavy monetary loss to the petitioners. Except in unusual circumstances, the majority group of shareholders should never be ordered or directed to sell their shares to the minority group of shareholders. An order directing the majority group of shareholders to sell his shares to the minority group of shareholders will not redress the wrong done to the majority group of shareholders and will-not give him sufficient compensation or relief against the act of oppression complained of by him, and, on the other hand, may add to his suffering and grievances and cause him greater hardship. Such an order will not further the ends of justice and indeed the cause of justice may be defeated.
20. In a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. In the present case all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. The petitioners have rightly invoked the provisions of these sections. If a member who holds the majority of share in a company is reduced to the position of minority shareholders in the company by an act of the company or by its Board of Directors malafide, the said act must ordinarily be considered to be an act of oppression to the said member. I am, therefore, of the view that the allotment of shares impugned in the company petition made for personal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the second respondent, which would constitute an act of oppression, as held in Praful M Patel v. Wonderweld Electrodes P. Ltd (2002) 6 Comp LJ 423, Akbarali A Kalvert v. Konkan Chemicals P. Ltd. (1994) 15 CLA 170(CLB (2002) 110 Comp. Cases 31 and M.K. Manilas v. Asal Malabar Beedi Depot P. Ltd. (2002) 48 CLA 10 (CLB) The member who holds the majority of shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit of advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own member to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares, appointing directors and removing the petitioners as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside.
21. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the fact of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations and fraud. To do substantial justice between the parties, I order as follows vacating the interim order dated 11.10.2004:
I. The proceedings of General Meeting of 20.8.2004 are declared as null and void and status quo ante is restored.
II. Since nothing has been placed on record to show the need of the company for further investment and hence need for allotment of additional shares, I hold action to be totally malafide, only motive being to gain control of company, and allotment of additional shares is hereby set aside.
III. Since I have held that the stand of the company that the petitioner and his son namely Shri Arun Kumar Mohta and Shri Yashovardhan Mohta had vacated office of director under Section 283(1)(g) cannot be sustained for the reasons given above, I declare that the petitioner and his son shall continue as directors of the company.
IV. R-3 Shri Basant Kumar Daga - is hereby removed from the Board of the respondent company forthwith as the appointment of this additional director has been without any notice to either Shri M.L. Bhaia or to petitioner 1 or his son -the other directors of the company as well as in consequence of the General Meeting dated 20.8.2004 having been declared null and void.
V. The respondents are hereby directed to bring back forthwith the sale proceeds of plant and machinery amounting to Rs. 12 lakhs received in cash in addition to other misappropriated funds by manipulating inflated fictitious expenses and liabilities i.e. Rs. 20.53 lakhs till 31.3.2003 and Rs. 20.71 lakhs for the accounting year 31.3.2004.
22. With the above directions, I dispose of this petition. No order as to cost.