Company Law Board
Shri Arun Mehra And Mrs. Seema Mehra vs Durga Builders Private Ltd. And Ors. ... on 2 February, 2006
Equivalent citations: [2007]138COMPCAS924(CLB), (2006)5COMPLJ575(CLB), [2006]70SCL370(CLB)
ORDER
S. Balasubramanian, Chairman
1. Since the petitioners and respondents other than the companies are common and the allegations as well as the reliefs sought are similar in both the petitions, and I am disposing of both these petition by this common order.
2. In so far as CP 59 of 2005 (Rajdhani Builders) is concerned, the allegations of the petitioners are: The company is engaged in the business of development of land for building purposes. In June, 1992, Haryana Government granted a license to the company for setting up a residential colony in district Faridabad in respect of 84.54 acres. The authorized and paid up capital of the company is Rs. 5 lacs divided into 5000 equity shares of Rs. 100/-. Out of 5000 shares, the 2nd respondent held 2500 shares and the 3rd respondent 2300 shares, balance shares were held by 8 other shareholders at 25 shares each. The petitioners and the 2nd and 3rd respondents entered into an agreement on 19.5.1997 by which the 1st petitioner acquired 2500 shares from the 2nd respondent for a consideration of Rs. 2.5 lacs and the 2nd petitioner acquired 2300 shares from the 3rd respondent for a sum of Rs. 2.3 lacs. In terms of the agreement, a board meeting was called on 19.5.1997 in which the 1st and 2nd petitioners were appointed as directors and the 2nd and 3rd respondents resigned as directors. The share certificates in respect of 4800 shares were handed over to the petitioners after duly registering the transfers. Thus, the petitioners came to hold 96% shares in the company. The reason for the agreement was that petitioners, through various companies controlled by them, had given substantial financial help to the 6th respondent which is a company controlled by the 2nd and 3rd respondents. In addition, the petitioners had also done substantial work for the colony being promoted by the 6th respondent. Even though the petitioners became majority shareholders and directors of the company, since the 1st respondent company could not develop the said colony due to paucity of funds, the petitioners did not take much interest in the affairs of the company. Only in the month of September, 2005, the petitioners came to know from the proceedings in a writ petition filed by the 6th,respondent before the High Court of Punjab & Haryana that the 6th respondent had obtained license for development of 235 acres of land from the 2nd respondent. Since the petitioners were aware that the 6th respondent had a license for 150 acres of land, the 85 acres of land belonged to the 1st respondent company should have been transferred to the 6th respondent. In addition, the petitioners also came to know that the 1st respondent company had entered into an agreement with one Aditya Cable Company Ltd. for transfer of 100% equity shares in the company. Thereafter, the petitioners took inspection of the books of records in the office of ROC and found that the 2nd and 3rd respondent are being shown as shareholders in respect of 4800 shares and they are also shown as directors notwithstanding the fact that these shares had been transferred to the petitioners in 1997 and both the 2nd and 3rd respondents had resigned as directors and the lst and 2nd petitioners have been appointed as directors. This would indicate that the substantial manipulation of the records of the company. With these allegations, the petitioners have sought for rectification of the register of members of the company by inserting the name of the 1st petitioner as shareholder in respect of the impugned 2500 shares and also the name of the 2nd petitioner in respect of 2300 shares impugned in the petition. They have also sought for removing 2nd and 3rd respondent and appointment of 1st and 2nd petitioners or their nominees as directors. They have also sought for a declaration that the purported transfer of the license in favour of the 6th respondent be declared as null and void.
3. In so far as CP No. 54 of 2005(Durga Builders) is concerned the allegations of the petitioners are: This company is engaged in the business of development of land for purposes of building colonies. The authorized capital of the company is Rs. 10 lacs divided into 1 lakh equity shares of Rs. 10/- each and the issued and paid up capital consists of 28500 equity shares of Rs. 10/- each. The 2nd respondent held 14500 equity shares and the 3rd respondent held 14000 shares. By an agreement dated 19.5.1997, the 1st petitioner acquired the shares held by the 2nd respondent for a consideration of Rs. 4.35 lacs and the 2nd petitioner acquired shares held by the 3rd respondent for valuable consideration. On the same day- 19.5.1997, in a board meeting of the company, the registration of transfers was approved and the share certificates were handed over to the petitioners. The 2nd and 3rd respondents resigned as directors and the 1st and 2nd petitioners were appointed as directors and the 1st petitioner was also authorized to operate the bank accounts of the company. In view of this, the 2nd and 3rd respondents ceased to have any right or title or interest in the company. After the implementation of the agreement, the petitioners came to know that the company was faced to criminal litigations due to its failure to discharge its obligations to the plot holders. The petitioners also came to know that they have not been/ shown as directors in the records of the company. Since the respondents assured the petitioners that after the conclusion of criminal litigations, the petitioners could take over the control of the company they did not protest. However, criminal cases are still pending and in exclusion of the petitioners, the respondents are enjoying the properties and benefits of the company. The petitioners have learnt that the respondents are proposing to sell the company which would be in complete breach of the agreement dated 19.5.1997. In the Returns filed with the Registrar of Companies, the respondents are shown to hold the impugned shares even though they had been transferred to the petitioners. With these allegations, the petitioners have sought for directions to the 2nd and 3rd respondents to act strictly in accordance with the agreement dated 19.5.1997 and the board resolution of that date and also for directions that the continuance of these respondents as directors after 19.5.1997 as illegal, null and void and also for a direction to induct the petitioners as directors of the company.
4. In the reply to CP 59 of 2005 (Rajdhani) the respondents have submitted: The petitioners are not shareholders of the company. The 1st petitioner was a contractor to develop the colony for the company and he has manipulated the accounts of the company and as such respondents have filed a suit for recovery of dues and rendition of ' accounts. The petitioners are trying to grab the company after the respondents have paid over Rs. 25 crores through the Deputy Commissioner of Police, Economic Offences Wing to various investors. As a matter of fact, the petitioners themselves have moved an application before Delhi High Court stating that the agreement is time barred. The petitioners were never interested in the company and as such it is wrong on their part to contend that because the company was in bad shape, they did not take over the control of the company. The agreement dated 19.5.1997 was purportedly entered into among the 1st and 2nd petitioners, one Class Sales Private Ltd., respondents 2 and 3 admittedly the said agreement was not signed by the 2nd petitioner and anyone on behalf of M/S Class Sales Pvt. Ltd. Therefore, the said agreement is no agreement in the eyes of law. Originally, the petitioners were interested in purchasing 50 plots of 505 sq. yds for a total consideration of Rs. 2.5 crores to be funded through their various sister concerns. With a view to grab the company, the petitioners entered into a bogus agreement with the company through through the 2nd respondent for taking over the entire assets and liabilities of the company. Thereafter, the 1st petitioner as a director of the company started issuing various cheques on behalf of the company. M/S Class Sales Private Ltd. also booked various plots in various schemes of the company and issued bogus receipts and misappropriated the amount collected. This has caused a number of investors to file criminal cases against the company. There is nothing on record of the office of ROC that the petitioners had become directors of the company even though they had acted as such in issuing various cheques on behalf of the company. Only when criminal cases started, the petitioners ran away from the company to avoid any penal action. Because of that the 2nd respondent was forced to take over the company and has been facing all the criminal cases. Further, since the entire petition has been filed on the basis of the agreement dated 19.5.1997, the same has been barred by limitation. If the petitioners are desirous of taking over the control of the company, they should also assume the responsibility of dealing with all criminal cases by substituting their names in those cases in place of the 2nd and 3rd respondents. The efforts put in by the 2nd and 3rd respondents as directors of the company is evident from the fact that so far they have paid more than Rs. 25 crores to the investors, they have settled around 28 cases under Section 138 of Negotiable Instruments Act by paying full amount, around 12 cases under order 37 of CPC have been settled out of court, the company has sold all vital properties and only registration is pending, the respondents are also prosecuting 52 civil cases which are pending before various civil and criminal courts.
5. In so far as CP 54 of 2005 (Durga Builders) is concerned, the respondents have filed a reply which is more or less similar to the reply to CP 59 of 2005.
6. Shri Sarkar, Sr. Advocate appearing for the petitioners submitted: It is an admitted position that there were two agreements dated 19th May, 1997- one relating to Rajdhani and another relating to Durga. By these agreements, shares impugned in the petitions relating to both the companies were transferred to the petitioners. Likewise, in the board meetings held on the same day, the 2nd and 3rd respondents resigned as directors and the 1st and 2nd petitioners were appointed as directors and the resignation of the 2nd and 3rd respondents as directors was accepted. The registration of transfers of shares in the names of the petitioners was also approved. Thus, on that day, the control of management of the companies was passed on to the petitioners. Even though, the net worth of the companies was negative since the companies were not doing any business, with a view to take control of the companies, the petitioners paid the consideration at par. The respondents are now disputing the veracity of the agreements and also the transfer of shares notwithstanding the fact that in the suit filed by them before the Delhi High Court, the respondents have admitted the existence, validity and contents of the agreement dated 19.5.1997. The petitioners did not take any action earlier to enforce their rights as the companies were not doing any business and there was all round depression in the real estate business. Further, there were also many criminal cases pending against the companies and therefore the petitioners did not actively participate in the affairs of the company The respondents cannot be allowed to continue to manage the companies as they are not only mismanaging the affairs of the companies but also are siphoning of the funds of the companies. Because of these acts on the part of the respondents, many criminal cases have been filed. In addition, they have reportedly transferred the licence granted to the Rajdhani for developing 85 acres of land in favour of Durga without any consideration. They have also inducted 4th and 5th respondents as additional directors on 4.9.2004 in Rajdhani, the fact of which came to the knowledge of the petitioners only in June, 2004. Their appointment by an illegally constituted board is abinitio invalid. Now it transpires that the 2nd and 3rd respondents never filed Form No. 32 regarding their resignations and appointment of the petitioners as directors and transfer of shares to the petitioners in respect of both the companies. . By this, in complete breach of the agreements and the board minutes, the petitioners have been excluded from the companies. In addition, the respondents are trying to sell both the companies. Only after these petitions have been filed, the respondents have filed criminal cases against the petitioners. Since the factum of transfer of shares and change of management has been established, the control of both the companies should be handed over to the petitioners and all other prayers in both the petitions should be granted.
7. Shri Agarwal, Advocate, appearing for the respondents submitted: Since both the petitions are based on the alleged agreements and theboard meetings held in May, 1997, these petitions should have been filed within 3 years but have been filed nearly after 9 years. As such the petitions are time barred in terms of Section 3 of the Limitation Act read with Articles 113 and 137 of the same Act. Further the alleged agreements have not been signed by all the parties to the agreements. M/s Durga has already filed a civil suit before Delhi High Court - Suit No 961 of 2004, even before the present petition were filed, seeking for a declaration that the said incomplete agreement is null and void and therefore this Board cannot decide the petition on the basis of the said incomplete agreement. The fact about the suit has been suppressed in the petitions. In the reply to the suit, the petitioners themselves have claimed that the agreement relied on by them herein was hopelessly time barred and as such had sought for dismissal of the suit. They cannot blow hot and cold at the same time and claim reliefs in the petitions on the basis of the time barred agreements. Actually, the petitioners were the contractors for the companies and more than Rs. 10.5 crores have been paid to them. However, this fact has been concealed in the petition. Because the 2nd respondent had full faith in the 1st petitioner, certain blank papers were handed over to him which the 1st petitioner has misused. Even the share certificates claimed to be in possession of the petitioners had been stolen by them and the signature of the 2nd respondent on the reverse of the share certificates are forged. Therefore, the respondents have filed an FIR in October, 2005 and have already initiated criminal proceedings seeking for seizure of the share certificates and other documents which are in custody of the petitioners. Various orders have been passed by the Supreme Court in the matter of both the companies and this fact has been suppressed by the petitioners in the petitions. It is the present management of the companies which has been prosecuting all the proceedings and in terms of the various orders passed by the courts, the respondents have already disbursed more than Rs. 25 crores to various plot allottees. Both the companies put together hold assets worth more than Rs. 100 crores but the petitioners allege to have purchased the companies for a few lakhs. There are more than 5000 plot holders to whom the company is responsible and therefore the question of any mismanagement in the company does not arise. As a matter of fact, the petitioners have already sold the shares allegedly held by them in M/S Durga to one Vishesh Jain by an agreement dated 26.4.2004 for a total price of Rs. 24,22,500 on the basis that they had allegedly acquired the shares from the respondents in terms of the agreement dated 19.5.1997. The said Jain has filed a civil suit seeking for refund of the consideration paid for the shares in suit No. 1136 of 2005 before Delhi High. Court. This fact has also been suppressed by the petitioners. Thus, the facts of the cases would indicate that there is no oppression or mismanagement in the affairs of the companies and as such both the petitions should be dismissed.
8. I have considered the pleadings and arguments and also the written submissions. The entire case of the petitioners in both the petitions is founded on the agreements dated 19.5.1997. Notwithstanding the stand of the respondents that the petitioners cannot rely on time barred agreements, it is a settled law that private agreements do not bind a company. Therefore, the allegations have to be examined only with a reference to the Board minutes of 19.5.1997, wherein the registration of transfers of the impugned shares were approved and the change in the Board was effected. Admittedly, the respondents have not questioned the correctness of the minutes or the factum of the Board meetings. In this connection, the averment of the petitioners is suit No. 961 of 2004 becomes relevant. In that suit, filed prior in time to the filing of these petitions, the respondents have claimed a sum of Rs 30 lakhs from the petitioners on the ground that the petitioners having been in management of M/s Durga from 1997 to 2001, were guilty of financial mismanagement and siphoning of funds. In Paragraph 6 of the written statement dated 5th March, 2005 in the suit (Annexure R-4), the petitioners have averred: That in reference to para 6 of the plaint it is submitted that agreement dated 19.5.1997 was entered between the plaintiffs and the defendant No. 1 with the sole intention of securing the substantial loan which the defendant through his group companies had advanced to the plaintiff. It is submitted that the plaintiff did not in fact fulfill substantial part of their obligation under the said agreement. The only thing they did under the said agreement that the sale of shares of the plaintiff company in favour of the defendants under group companies. The defendants were never put on the board of the plaintiff company". In para 7, it is further averred: "It is denied that pursuant to the said agreement, the entire assets and liabilities of plaintiff No. 1 were handed over to the defendant No. 1 and 2 ". In para 10, it is averred: "It-is submitted that the question of deleting the names of the defendants from the Register of Companies does not arise as the defendants, in the first place, had never become the directors in the company ". In para 11, it is further averred: "With reference to the present para under reply, it is submitted that the question of filing Form 32. or any other form did not arise as defendants 1 and 2 had never become the directors in the plaintiff company. In fact, the defendants never functioned as directors of the company even otherwise. It is rather incomprehensible to even suggest that the defendants were allowed to function as a director by the plaintiff No. 2 i.e. the Managing Director of plaintiff No. 1 without there being a valid appointment.... Significantly, Mr. R.K. Nanda is a permanent director of Durga Builders as per Articles & Memorandum of Association.
9. By these averments, by claiming that they were never validly appointed as directors, they have questioned the factum and validity of the board resolutions dated 19.5.1997 but in the present petitions they claim that they were appointed as directors in those meetings, while in the present petition, they seek relief on the basis of these meetings. In a proceeding under Sections 397/398, the conduct of the parties even in other proceedings becomes relevant. The petitioners cannot blow hot and cold at the same time. If their averment in the civil suit which is prior on time to the filing of the present petitions is taken into consideration, then, the petitioners cannot claim to have been appointed as directors of the company nor their stand that the respondents 2 and 3 had resigned as directors could be accepted. Likewise, if they question the factum of the Board minutes, then they cannot also rely on the same minutes regarding registration of the shares in their favour especially when the respondents allege that the share certificates had been stolen by the petitioners.
10. In the present petitions, the petitioners have averred that they did not take control of the management of the companies because of various criminal proceedings pending against the companies. It is on record that it is the 2nd and 3rd respondents who have been prosecuting all the cases against the companies and it is also on record that they have paid over Rs. 25 crores to the investors. In other words, it is the 2nd and 3rd respondents who have been carrying on the management of the affairs of the company in spite of various proceedings against the company while the petitioners, claiming that they hold 100% shares in Rajdhani and 96% shares in Durga, did nothing right from 1997 as per their own averments. The Company Law Board is a court of equity and considering the equities between the parties, I find that the equity is in favour of the respondents as it is they who have been nurturing the companies even while facing the brunt of various criminal cases and have parted with over Rs 25 crores in settling claims. Therefore, it would be highly unjust to grant the prayers sought for by the petitioners. In this connection I may beneficially refer to the observation of the Division Bench of Delhi High Court regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd 44 CC 390: Holding that while exercising equity jurisdiction, which clothes the court with discretionary powers, the Court observed "The discretion cannot be 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. Another equally well known maxim is that where both parties to the litigation are at fault, the defendant's position is stronger (see Pomeroy's Equity Jurisdiction, Vol 2, page 90) In the present case, I note that the petitioners have not come with clean hands in the sense, they have not only suppressed the fact about the civil suit they have also suppressed the information about the sale of the shares of Durga to a third party. In Mathur v. Har Swamp Mathur 40 Comp Cas 282 (All), the Allahabad High Court has observed "the court has to be careful and astute enough to prevent a misuse of the provisions of sections 397/398 by a party, lest a remedy proposed and granted to overcome an alleged mischief becomes a source of greater oppression than the one sought to be removed or prevented. In the present case, the petitioners claiming to the largest shareholders and directors of the company, being shy of facing various criminal cases for many years) now seek to take over the companies when they have started turning corner, which cannot, in equity, be permitted. Such a relief, if granted could be highly oppressive to the respondents. Thus, the petitioners have not established any act of oppression or mismanagement in the affairs of the companies and as such these petitions deserve to be dismissed. Even then, to put an end to the disputes, since the petitioners claim that they have paid consideration for the shares, I could have directed the respondents to refund the consideration received for the shares. But the respondents are claiming that the petitioners had stolen the certificates and forged the signature of the 2nd respondent and criminal proceeding is pending regarding the same,
11. Both the petitions are dismissed with no order as to cost. All interim orders stand vacated.