Company Law Board
A.H. Ahmed Jaffer vs Ace Rubber And Allied Products Private ... on 24 November, 2003
Equivalent citations: [2004]52SCL350(CLB)
ORDER
1. The substantive allegations in this petition filed under Sections 397 and 398 of the Companies Act, 1956 ("the Act") in relation to the affairs of M/s ACE Rubber and Allied Products Private Limited ("the Company") are that the petitioners' group has been excluded from the management of the Company in spite of having been a part of the management since the inception of the Company; that the second respondent has not been convening and holding general or annual general or Board meetings nor issuing notices to such meetings; that the second respondent failed to render accounts of the Company, settle the dues of the financial institutions out of the sale proceeds of the assets of the Company; and improperly managed the affairs of the Company in gross violation of the statutory requirements.
2. Shri Srinivasan Ramasamy, Practicing Chartered Accountant, while initiating his arguments submitted that the Company was incorporated in September 1983 with the main object to carry on the business of manufacturers and sellers of rubber and allied products. The petitioner's father and the second respondent's father are promoters of the Company. The authorised capital of the Company is Rs. 6 lakhs consisting of 600 equity shares of each Rs. 1,000/- and paid-up capital Rs. 1,56,000/- consisting of 156 equity shares of Rs. 1,000/- each. The petitioner together with his family members and relatives hold 56 shares constituting 35.95 per cent and the second respondent with his family members and relatives hold 100 shares of the Company representing 64.1 per cent of paid-up capital of the Company. The petitioner's father, the second respondent's father and the second respondent are subscribers to the Memorandum of Association of the Company subscribing to one share each. The petitioner's father was the Managing Director looking after the affairs of the Company till his demise on 24.06.1990. The father of the second respondent was the chairman of the Company till 02.07.1986, when he passed away. During their life-time, they had purchased a land in the name of the second respondent for erecting the plant and machinery and the land was leased out to the Company for the purpose of carrying on its business. The Company had borrowed funds from The Pondicherry Industrial Promotion Development and Investment Corporation ("PIPDIC") for construction of shed and purchase of plant and machinery against the security of the assets of the Company. The petitioner who became a director on 18.06.1990 was appointed as the Managing Director of the Company upon the demise of his father on 06.07.1990. The second respondent who became a director of the Company with effect from 06.09.1983 claims himself to be the Chairman of the Company with effect from 18.06.1990 though he was not elected as chairman of the Company for a particular period either in the Board meeting or general body meeting of the Company. The first petitioner has been looking after the manufacturing activities of the Company while the second respondent, a chartered accountant is in charge, of the financial transactions and maintaining the entire accounts including the secretarial work of the Company and various statutory compliances of the Act. However, the second respondent has been was managing the affairs of the Company contrary to the Articles of Association of the Company by not convening, since June 1990, any Board meeting or annual or general meeting of members of the Company. The second respondent has neither issued any notice to any of such meetings thereby the shareholders have been kept in dark of the affairs of the Company. The second respondent wantonly failed to file the statutory returns with the Registrar of Companies, Pondicherry. The second respondent has not issued share certificates to any of the shareholders of the petitioners' group. The share certificates issued by the second respondent are also not in conformity with the Companies (Issue of share Certificates) Rules, 1960. While the Company had allotted certain shares during the years 1984 and 1985 to the majority shareholders, without adhering to the Issue of Companies Share Certificate Rules, 1960, no shares were allotted in favour of the minority shareholders. Though the shares were allotted in the year 1984 and 1985 by the Company, no details of such allotments are available either with the Company or with Registrar of Companies, Pondicherry. The Board of Directors of the Company had approved transfer of certain shares on 27.08.1990 and also the transmission of certain shares on 27.08.1990 when the petitioner was on the Board of the Company, but there was no Board meeting convened on these dates approving the transfer and transfer of shares and therefore they are not valid. The second respondent used to prepare the balance sheet and profit and loss account of the Company every year and send copies of the same duly certified in the capacity as Chairman. The first petitioner being the Managing Director had never signed the original balance sheet and profit and loss account for the years as at 30.03.1991 to 30.03.1998. The second respondent thereby violated the provisions of Section 215 of the Act, according to which every balance sheet and profit and loss account of the Company should be signed on behalf of the Board by the Managing Director as well as director and in case there is no Managing Director any two of the directors should sign the balance sheet. The appointment of the statutory auditor of the Company was being made by the second respondent without consulting the petitioner who acted in connivance with the second respondent contravening the provisions of the Section 227 of the Act. The second respondent and the statutory auditor carried on the affairs of the Company, according to their whims and fancies and they are jointly responsible for the present state of affairs of the Company. Thus, the second respondent has violated the provisions of Sections 166, 169, 215 & 220 and liable for penal action. During the year 1988, when the Company had committed default in repayment of the loan to PIPDIC, the latter initiated steps for bringing the assets of the Company in public auction. Both the petitioner and second respondent made efforts to settle the dues of the PIPDIC through the intervention of the High Court of Madras to sell the assets of the Company and accordingly conveyed a part of the landed property in favour of different purchasers and remitted the sale proceeds towards part satisfaction of the dues with PIPDIC and continued the business of the Company. The second respondent in the process had also received sale consideration from third parties and executed sale deeds in their favour, but failed to remit sale proceeds towards the dues of the Company with PIPDIC. The second respondent neither furnished the accounts of the Company from the year 1998-99 to 2000-01. When the petitioner questioned the second respondent of these irregularities, the latter issued a notice dated 24.10.2001 convening an extraordinary general meeting of the Company on 16.11.2001 in order to remove the petitioner as the Managing Director of the Company and appointing the second respondent's brother as the Managing Director of the Company. Shri Srinivasan Ramaswamy pointed out that no Board meeting was convened to approve the extraordinary general body meeting before removal of the petitioner. Any resolution for removal of a director requires special notice in terms of Section 190 of not less than 21 days in terms of Section 190. This requirement has neither been met by the second respondent. Therefore, the notice dated 24.10.2001 for convening the extraordinary general meeting is not valid. The petitioner, upon receipt of the said notice dated 24.10.2001, filed a civil suit in OS No.6530 of 2001 on the file of City Civil Court, Madras on 12.11.2001 restraining the second respondent from convening the extraordinary general meeting proposed on 16.11.2001 to remove the petitioner. Similarly, the petitioner's brother has filed a civil suit before the Principal District Munsif Court at Pondicherry against the second respondent challenging the validity of the notice dated 24.10.2001. In both these suits, a prayer has been made for a permanent injunction restraining the second respondent from holding the proposed extraordinary general meeting. However, during pendency of these suits and the Company Petition, the second respondent proceeded with the general body meeting of the members and removed the petitioner from the office of Managing Director, constituting an act of oppression in the affairs of the Company. The second respondent never allowed the petitioner to discharge his functions as Managing Director of the Company, but he has been carrying on day-to-day management of the Company excluding the petitioner from the day-to-day management of the Company, in support of which the petitioner referred to various letters written by the second respondent (Annexure A-1 to A-12). These letters show that the second respondent was all along carrying on the day-to-day affairs of the Company and giving instructions to the petitioner in his behalf. Thus, it is only the second respondent who has been managing the affairs of the Company and never allowed the petitioner even to authenticate the accounts of the Company in any of the financial years of the Company. The Income Tax returns were also filed mostly only the second respondent. The second respondent having custody of the statutory records and books of account was exercising substantial power administering the affairs of the Company without taking into confidence the petitioner.
3. Shri S.P.L. Palaniappan, Counsel appearing for the second respondent has submitted that the Company was incorporated by late S.M. Haneef and late M.J. Abdul Hadi, father of the petitioner and second respondent respectively and the second respondent as borne out by the Memorandum and Articles of Association of the Company. It is the second respondent who had acquired the land under dispute out of his own funds on 22.07.1982 even prior to incorporation of the Company and not out of funds of either of the remaining promoters of the Company. By virtue of a registered lease agreement dated 05.11.1983, the second respondent leased out the landed property in favour of the Company for a period of 10 years for the purpose of erecting the machinery belonging to the Company to carry on its manufacturing activity. Therefore, the second respondent is having free hold right over the said landed property while the Company has lease hold interest over the said landed property. The Company has no absolute right or title or interest over the landed property purchased by the second respondent. The petitioner's father during his tenure as Managing Director did not invest any money of his own for running the business. Similarly, the petitioner who became Managing Director of the Company on the demise of his father did not extend any financial assistance to run the business. Thus, the second respondent has been extending financial support to the Company from time to time and paying interest to PIPDIC on account of the loan taken by the Company. According to the respondents, the day-to-day affairs of the Company are being managed by the petitioner, being the Managing Director of the Company. It is the responsibility of the petitioner to maintain accounts and prepare and submit to the statutory authorities. The Managing Director is under obligation to convene Board meetings and annual general meetings and comply with the statutory requirements from time to time, which the petitioner failed to carry out the same. There has been no understanding between the petitioner and the second respondent for maintenance of accounts and managing the financial transactions of the Company by the second respondent. Shri Abdul Rahim pointed out that the petitioner was never authorised to sell the landed property acquired by the second respondent. The second respondent never approached the petitioner's mother to sell a portion of the property in favour of the petitioner's mother. The property of the Company can be sold only with sanction of the Board of Directors of the Company and not by either the petitioner or the second respondent. According to the respondents, the Managing Director failed to discharge his duties as envisaged by the Articles of Association of the Company compelling the second respondent to convene an extraordinary general body meeting in the interest of the Company. Accordingly, a notice dated 24.10.2001 was issued to all the members of the Company convening general body meeting of members of the Company on 16.11.2001 for removing the petitioner from the office of Managing Director, upon which one Mr. A.H. Md. Mahmood, brother of the petitioner has filed a suit in O.S. No. 751 of 2001 on the file of the Principal District Munsif's Court, Pondicherry against the Chairman of the Company for a permanent injunction restraining him from holding the extraordinary general meeting proposed on 16.11.2001. As no order of interim injunction has been granted by the District Munsif Court, Pondicherry, the petitioner has filed a suit in O.S. No. 6530 of 2001 on the file of Civil Civil Judge, Chennai for declaration that the notice dated 24.10.2001 seeking removal of the petitioner from the office of Managing . Director is not valid and obtained an order of interim injunction restraining the Company from convening the extraordinary general body meeting of the Company on 16.11.2001. However, the said order of interim injunction was finally vacated by the court of City Civil Judge, Chennai by dismissing the application on 30.07.2002. The notice dated 31.07.2002 convening the extraordinary general meeting of the Company was sent by registered post to all the shareholders including the petitioner and his family members. The shareholders holding 85 shares out of 156 shares attended the extraordinary general meeting on 22.08.2002 by their notice dated 31.07.2002. The said notice was sent to the shareholders by registered post. The notices sent to the petitioner and his relatives have been returned with postal endorsement "has left". Thus, the majority shareholders holding 85 shares participated in the extraordinary general meeting held on 22.08.2002 and unanimously resolved removing the petitioner from the post of Managing Director. In view of the removal of the petitioner from the office of Managing Director, the relief claimed by the petitioner in Company Petition has become infructuous and hence the petition is liable to be dismissed. As the petitioner failed to make out any case under Section 397/398, the petition is liable to be dismissed. When notices were sent for the extraordinary general body meeting to all the shareholders, neither the petitioner nor his family members participated in the said meeting. -Thereafter, the Company had duly convened an extraordinary general body meeting on 22.08.2002 after issue of due notice to the members of the Company, wherein the petitioner was removed from the post of Managing Director and one Mr. H.M. Sultan Mohideen was appointed as the Managing Director of the Company. The removal of the petitioner as the Managing Director as well as the appointment of the new Managing Director was duly intimated to the Registrar of Companies by filing form-32 on 23.08.2002. When the petitioner failed to carry on the administration of the Company, there was no other way, but to call for the extraordinary general body meeting in the interest of the Company and accordingly the petitioner was duly removed from the office of the Managing Director of the Company.
4. When the Company failed to repay the dues of PIPDIC, the latter took over the assets of the Company for non-payment of its dues, upon which, the petitioner has filed a civil suit in O.S.No. 420 of 2002 on the file of the Additional District Munsif, Pondicherry for settling the dues and release of the factory. Though the petitioner offered to settle the entire dues by one time payment, he never honoured his commitment. However, the second respondent took the initiative to mobilise funds by sale of the assets of the Company and remitted a sum of Rs. 7,40,929/- towards settlement of the dues of PIPDIC. When PIPDIC did not release the assets of the Company in view of pendency of suit in O.S. No. 420 of 2002 on the file of Additional District Munsif, Pondicherry, the second respondent was constrained to file a writ petition in WP No. 280 of 2003 before the High Court of Madras seeking directions against PIPDIC to deliver possession of the factory building and assets of the Company and also documents of title to the said property. The petitioner who got impleaded himself in the writ proceedings, opposed the handing over of assets of the Company in favour of the second respondent on the ground that the Company may alienate its assets. However, the High Court on an undertaking given by the second respondent that the Company will not alienate its assets till a final decision is taken by the majority of the shareholders of the Company in the general body meeting, directed PIPDIC to deliver possession of the factory, building, plant and machineries in favour of the second respondent on payment of the security charges. Accordingly, the second respondent" took possession of the entire assets of the Company and also documents of title from PIPDIC on 23.07.2003.
5. We have considered the arguments advanced by the learned Counsel. The facts as revealed from the materials before us show that the Company was incorporated on 06.09.1983 by the late Abdul Hadi, father of the petitioner, late Md. Haneef, father of the second respondent and the second respondent, being subscribers to the Memorandum of Association and the first directors of the Company. The petitioner's father was the Managing Director of the Company till his demise on 24.06.1990. The second respondent's father was the chairman of the Company till his demise on 02.07.1986. The petitioner who was appointed as a director on 18.06.1990 became the Managing Director of the Company on 06.07.1990. The second respondent who became a director with effect from 06.09.1983 was functioning as the chairman of the Company with effect from 18.06.1990. The petitioner together with his family members and relatives hold 56 equity shares of the Company, while the second respondent along with his family members and other relatives hold the remaining 100 equity shares. The entire shareholding of the Company is held between the petitioner and second respondent along with their family members. Thus the management which was in the hands of the father of the petitioner & second respondent is now with the petitioner and the second respondent. It is therefore, beyond doubt that the Company is a family company and therefore the principles of partnership are attracted. The petitioner has categorically affirmed in the petition that the second respondent has been the chairman of the Company. The various correspondence produced by the petitioner unequivocally show that the second respondent is functioning as the chairman of the Company. Moreover, the petitioner never took the plea before the High Court in writ W.P.No. 280 of 2003 that the second respondent is not the chairman of the Company. On the other hand, the petitioner who got himself impleaded in WP No. 280 of 2003 only opposed the delivery of possession of assets of the Company to the second respondent on the sole ground that the second respondent may alienate the assets of the Company, depriving the interest of the shareholders of the Company. It is observed from the order dated 09.07.2003 of the High Court, the High Court after recording the undertaking of the second respondent that he will not alienate the property belonging to the Company till a final decision is taken by the majority of the shareholders of the Company in the general body meeting, directed PIPDIC to deliver the property of the Company in favour of the second respondent. At no point of time the petitioner contended before the High Court that the second respondent is not chairman of the Company. It is, therefore, clear that the Company is in the joint management of the petitioner as the Managing Director and the second respondent as the chairman of the Company. The plea of the petitioner that the second respondent is not the chairman of the Company must fail. Against this background, the alleged acts of oppression and mismanagement have to be considered. It is not disputed that the land in RS No. 150/2, Abhishegapakkam village, Ariyankuppam, Pondicherry was purchased on 22.07.1982 in the individual name of the second respondent. The Company was only incorporated on 06.09.1983, after acquisition of the landed property in the name of the second respondent. While, according to the petitioner the land was purchased by the promoters of the Company out of their funds under the name of the second respondent, it is stoutly denied by the second respondent. There is no document to show that the promoters purchased the land out of their investments in the name of the second respondent. The petitioner has admitted in the petition that the details of the amount invested by the promoters are not available. The Company had further offered the lease hold rights over the landed property, land together with building constructed thereon, plant and machinery to secure the loan amount availed from PIPDIC. By virtue of a registered agreement of lease dated 05.11.1983, the second respondent had leased out the landed property to the Company for putting up the factory premises for a period of ten years. Moreover, the power of attorney dated 19.07.1999 (page 83 of petition) executed by the second respondent in favour of the petitioner for sale of the said land is found to be executed, by the second respondent in his individual capacity and not for and on behalf of the Company. These factors prima-facie show that the landed property under dispute is of the second respondent. The Company cannot claim absolute right over the said landed property. We cannot go into the claim and counter claim of the title to the landed property, in the present proceedings and the petitioner. However, the properties belonging to the Company shall be dealt in accordance with the Articles of Association of the Company, according to which, it is only the Board of Directors of the Company which is vested with the powers of selling the assets of the Company, and not with the petitioner or the second respondent exclusively. In regard to the removal of the petitioner from the office of Managing Director of the Company, though we find that he was removed at the extraordinary general body meeting held on 22.08.2002 in the absence of any order of injunction both in OS No. 751 of 2001 on the file of District Munsif Court, Pondicherry and in O.S.No. 6530 of 2001 on the file of the City Civil Judge Court, Chennai, yet, in our view, the removal of the petitioner is oppressive of the minority shareholders, especially when the Company is found to be a family company and always managed by the both groups. The act of the second respondent may be lawful, but is oppressive of the minority shareholders. Hence, applying the principles of partnership to the present case, as has been held in a number of cases, we find that the removal of the petitioner is not proper and against the principles of partnership which has been breached by the second respondent. The petitioner has made quite a number of allegations against the second respondent in regard to non-issue of share certificates, non-allotment of shares in favour of the petitioners' group, non-convening of Annual General meeting and Board meetings and non-complying with statutory requirements from time to time. At this juncture, it is to be borne in mind that the petitioner is the Managing Director and the second respondent is the chairman of the Company. Article 35 of Articles of Association of the Company specifically stipulate that the Board of Directors are vested with day-to-day affairs of the Company. By virtue of Article 38, the Managing Director is empowered to carry on the management of the Company subject to the supervision and general control of the Board of Directors of the Company. Thus, the Managing Director at the relevant point of time was equally under obligation to ensure compliance with the statutory obligations prescribed under the Act. In these circumstances, there is no need to go into the acts of commission and omission alleged against the second respondent. For violations, if any of the provisions of the Act, it is for the appropriate statutory authority to initiate appropriate action against the Company and its officers in default.
Thus, we find that the petitioner has not established either acts of oppression or mismanagement in the affairs of the Company except in relation to the removal of the petitioner as the Managing Director, which act, we have held as an act of oppression in the family company. Mere putting him back on to the Board, even though would put an end to this complaint, will not be a permanent solution in view of the strained relations between the parties. Therefore, it is desirable that the petitioner goes out of the Company on receipt of fair consideration for his shares. Therefore, we give the option to the petitioner either to continue on the Board or go out of the Company. Whatever option he chooses will be binding on the Company and the respondents. He must intimate to the Company/the respondents his choice of the options within 15 days from the date of receipt of the order. In case he desires to go out of the Company, the statutory auditor of the Company will compute the fair value of his shares within a period of one month from date of receipt of his intimation exercising this option. The Company/the respondents will pay the consideration as computed by the auditor within a period of one month thereafter. In case the Company purchases the shares, it is authorised to reduce the share capital to the extent of face value of shares. In case he chooses the option to be on the Board, he will be deemed to have been appointed as a director from the date on which he intimates to the Company his choosing this option.
The petition is disposed of in the above terms.