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K.K. Balu, Member

1. The petitioners constituting more than one-tenth of the total number of members of Best Vestures Trading (P) Ltd. ('the company') have filed this company petition under Sections 397 and 398 read with Section 402 of the Companies Act, 1956 ('the Act') alleging the following acts of oppression and mismanagement in the affairs of the company:

(a) exclusion of the petitioners from day-to-day affairs and management of the company;

(b) illegal allotment of 12,000 equity shares, in favour of the second respondent; (c) illegal removal of the petitioners as directors of the company;

(d) illegal appointment of the third respondent as a director of the company;

(e) manipulation and falsification of the books of account and other records of the company and financial mismanagement in the affairs of the company; and

(f) misappropriation and misapplication of funds and diversion of the business of the company for personal benefits of the second respondent.

2. Shri T.K. Seshadri, learned counsel, while initiating his arguments submitted that the first petitioner was originally carrying on a sole proprietary concern since the year 1972, dealing in threads and garment accessories, which was converted into the present company on 27.03.1997 for the benefit of his sons, being the second petitioner and second respondent. The petitioners and second respondent are subscribers to the memorandum of association of the company. The authorised share capital is Rs. 2,00,000 divided into 20,000 equity shares of Rs. 10 each. The issued, subscribed and paid-up capital is Rs. 1,62,000 divided into 16,200 equity shares of Rs. 10 each. The petitioners and second respondent are the only shareholders and they have been the directors since the very inception of the company. The second respondent has been appointed as the first managing director. The articles of association contemplates that the equity shares of the company must be held in equal proportion between the petitioners and second respondent. The managing director vested with the management of the business of the company, illegally allotted 5,900 equity shares in his favour and 3,800 shares to the second petitioner on 30.03.1998 and 6,100 equity shares on 20.03.2000 in his favour, without issue of any shares in favour of the petitioners. No Board meeting was held either in December 1998 or in March 2000 allotting the impugned shares. The petitioners were neither aware of the allotments nor consented to the impugned allotments. The issue of shares being contrary to the articles and not supported by any consideration-must be set aside. Shri Seshadri, learned counsel, pointed out that the second respondent never made a request for convening any extraordinary general meeting to remove the second petitioner from the office of director of the company. The second respondent, did not choose to produce any notice in regard to the Board meeting allegedly held on 25.04.2002 or any minutes of such meeting before this Bench. According to the petitioners, no Board meeting was held on 25.04.2.002 and the second respondent alone could not constitute a valid quorum for the meeting. The Board of directors did not call for any extraordinary general meeting on 17.05.2002. Moreover, a special notice as contemplated under Section 284 read with Section 190 is mandatory for removal of any director. This requirement has not been satisfied in the light of the fact that no notice was served on the second petitioner, who was sought to be removed from the post of director. The second respondent by making use of certain signatures of the first petitioner obtained in blank papers fabricated the records of the company as if an extraordinary general meeting of the company was convened on 17.05.2002, removing the second petitioner from the office of director and co-opting the third respondent as a director of the company. Shri Seshadri, learned counsel, pointed out that the first petitioner was away to Thiruvannamalai on 17.05.2002 and that he neither presided over the meeting nor signed any minutes and in fact, no such meeting was ever held on 17.05.2002. The minutes of the purported extraordinary general meeting held on 17.05.2002 is a concocted document. Therefore, the removal of the second petitioner and the appointment of the third respondent as a director of the company are illegal and void ab initio. In the meantime, the second respondent had sent a legal notice on 29.05.2002 informing the first petitioner that he ceased to be a director of the company with effect from 14.05.2002. At no point of time, the first petitioner submitted any letter of resignation. It is a fabricated document, as borne out by the fact that the said letter of resignation was neither filed along with the main counter statement or counter statement filed in the company application. No. 69 of 20.02. Any unlawful exclusion of the petitioners from the management of the company would constitute an action of oppression in the affairs of the company. According to the petitioners, the second respondent misappropriated funds of the company from and out of the receivables realised from Dust Hakars, Prakash Garments and others and also cash withdrawals from the bank account to the tune of Rs. 17.84 lakhs out of which a sum of Rs. 10.32 lakhs was utilised and adjusted towards purchase of a flat in the name of the second respondent and the remaining balance amount of Rs. 7.53 lakhs standing to the credit of the company was transferred to his personal account. The cash withdrawals and cash transfers from the company's account to the tune of several lakhs of rupees were not towards the conduct of business of the company. The statement of accounts filed by the second respondent indicates cash withdrawals, utilisation of which has not been established by the second respondent. While the first petitioner was paid a salary of Rs. 6,000 per month and the second petitioner, Rs. 5,000 per month, the second respondent recorded in the books of account, as if the first petitioner was paid a sum of Rs. 1,30,000 and the second petitioner Rs. 1,39,000 per annum, thereby making unlawful gain aggregating Rs. 1,37,000 per annum. However, the petitioners are not paid their remuneration since the month of April 2002. The second respondent had filed in the name of the company the income tax return for the year ended 31.03.2001, exaggerating the salaries paid to the petitioners and the third respondent, when the third respondent was neither a manager nor a director of the company, of which the petitioners have already complained before the Income-tax Authorities. While the first petitioner did not continue any business in his name, after the incorporation of the company, the second respondent created records as if the first petitioner continued to carry on his proprietary business and accordingly manipulated the signatures obtained in blank income tax return forms and other documents and filed false income tax returns before the Income-tax Authorities. The second respondent diverted the business of the company to Texfab, a partnership firm started by him and Trims India Co., a proprietary concern, run in the name of the third respondent, as borne out by copies of the statement of accounts of Indian Bank and the visiting cards in the name of Trims India Co. Both these entities are carrying the business in the same registered office premises of the company. The second respondent recently purchased a flat for an amount of Rs. 22 lakhs by deceiving the petitioners and shareholders of the company. The separate business carried on by the second petitioner independently under the name and style of Bee Vee Traders, a sole proprietary concern, does not have any relevance either to the company or to company petition. The communication, dated, 10.09.1998, addressed by Prakash Garments in favour of Bee Vee Traders was in fact addressed to the attention of the second respondent, which clearly shows that the second respondent was doing business for the second petitioner. Similarly, the second respondent was corresponding under the name of Bee Vee Traders in favour of customers like Vishnu Wears (P) Ltd. as borne out by the communications produced before this Bench. The transactions carried on under the sole proprietary business would not appear in the books of account and cannot be reflected in the balance sheet of the company. In these circumstances, the Company Law Board may appoint an independent auditor to inspect the books of account of the company to find out diversion of the business to the business concerns of the second respondent and misappropriation of funds and receivables of the company and the proprietary concern of the petitioners and surcharge him for such misappropriation. Shri Seshadri, learned counsel, while concluding his submissions pointed out that the second respondent was directed by an order dated 16.07.2002 of this Bench to furnish a statement of purchases and sales made on account of the company, as on the last date of every month, which was totally disobeyed by the second respondent, entitling the petitioners for the prayers made in the company petition.

4. I have considered the pleadings and arguments advanced by learned counsel. Before considering the company petition on merits, it is necessary to observe that a number of attempts have been made for an amicable settlement of disputes between the parties. The parties have exchanged certain terms of compromise on more than one occasion. In fact, even at the conclusion of hearing, the second respondent expressed his willingness to pay Rs. 1,00,000 to the first petitioner and second petitioner a sum of Rs. 2,00,000 towards their shareholdings in the company or in the alternative, the second respondent was agreeable to transfer his entire shares to the petitioners for a total consideration of Rs. 3,00,000. The petitioners were reluctant about the proposal for paucity of doubtful creditworthiness of the company on account of the purported misappropriation of funds of the company and as such, the compromise efforts failed. I shall, therefore, now consider the rival contentions of the parties. The facts as revealed from the materials placed before me show that the company was incorporated on 27.03.1997 with the main objects to acquire the business of dealing in threads and garment accessories carried on by the first petitioner and to manufacture and deal in all kinds of threads and garment accessories. The petitioners and second respondent are subscribers to the memorandum of association and articles of association of the company, each subscribing to 100 shares of Rs. 10 each and the first directors of the company. The entire shareholding of the company is held among the petitioners and the second respondent. Article 3 prohibits any invitation to the public to subscribe for any shares in or debentures of the company, Article 5 stipulates that any issue of shares shall be offered to the existing shareholders in proportion to their holdings. It is beyond doubt that the company is a family company; and therefore, the principles of partnership are attracted. Against this background, the alleged acts of oppression and mismanagement in the affairs of the company shall be considered. While according to the petitioners, the allotment of 5,900 equity shares in favour of the second respondent, 3,800 shares to the second petitioner in December 1998 and the allotment of 6,100 equity shares in favour of the second respondent in March 2000 are in violation of the articles of association of the company, it is, contended by the second respondent that the allotments impugned in company petition were made with the knowledge and consent of the petitioners. It is on record that the petitioners and the second respondent are equal shareholders till the allotment of impugned shares made by the second respondent. By virtue of articles 14 and 15, the management of the company shall vest in the managing director, having powers to do all such acts within the framework of the Act. Article 5(a) envisages that the shares are under the control of the directors. Any issue of shares shall be offered to the existing shareholders in proportion to their holdings as on the date of issue of shares by the directors. There is no material show that the second respondent made any such offer to the petitioners in proportion to their holdings in accordance with article 5(a), before the allotment of impugned shares in favour of second petitioner and himself. The articles of association are the internal regulation of the company, according to which the directors are bound to act, regulating the internal management of the company and any act outside the articles is irregular unless ratified by the members. This wrongful act is such that its effect would be a continuous act of oppression and therefore, cannot suffer from laches, as contended by the second respondent. The plea of the second respondent that the shares were not issued as per the articles of association in view of the fact that the company was incorporated for his sole benefit and further that the sole proprietary concern of the first petitioner was not taken over by the company are not only contrary to the materials on record, but also remain unsubstantiated. Moreover, the managing director is in a fiduciary position vis-a-vis the company and must act bona fide in the exercise of Ms fiduciary responsibilities for the benefit of the company in further allotment of shares, there exists a relationship of a trustee and cestui que trust as between the directors and company. If this trust is found to be violated, the action of managing director is liable to be intervened by the Company Law Board. The responsibility of the managing director towards members becomes more onerous in a private company and, therefore, the courts have applied the quasi-partnership theory in such cases in the past and have granted appropriate relief if the parity is sought to be disturbed. It is settled proposition of law that further shares could be issued only for the benefit of the company and not with a view to create a new majority, even if the powers to issue shares is vested in the Board. If the purpose of allotment of shares is for upsetting the existing shareholding to the detriment of one group, then such an allotment of shares is to be held an act of oppression, whether or not partnership principles are applied.

4.3 The first petitioner by a letter, dated 09.05.2002 (page 119 of company petition) categorically advised the second respondent that, 'there, was no Board meeting held with clue notice to me and no extraordinary general meeting was ever called. The second respondent, instead of properly answering the complaint of the petitioners that 'an extraordinary general meeting cannot be conducted without a Board meeting', simply conveyed in his communication dated 14.05.2002 sent to the second petitioner's advocate (page 121 of company petition) that he as the managing director was quite competent to call for a general meeting, thereby failing to establish the legal requirement of the meeting of the Board of directors of the company before convening the extraordinary general meeting on 17.05.2002, for removal of the second petitioner from the post of director and co-opting the third respondent as a director of the company. In the absence of any such Board meeting, the proceedings of the extraordinary general meeting purportedly held on 17.05.2002 cannot be valid. There is absolutely no material on record to show that any board meeting was held for convening the extraordinary general meeting of the company held on 17.05.2002. Under these circumstances it would be a futile exercise to go into the legality or otherwise of the minutes of the extraordinary general meeting. While, the extraordinary general meeting was purportedly held on 17.05.2002 and the minutes of the said meeting were said to be signed by the first petitioner, as Chairman of the meeting on 17.05.2002, the first petitioner could not cease to be a director of the company as made by the second respondent with effect from 14.05.2002, vitiating the proceedings of the general body meeting on 17.05.2002. There is no explanation for this conflicting situation. The removal of any director in a private company, even if it is found to be lawful, may in certain circumstances constitute an act of oppression in reference to the aggrieved director. Similarly, even if the extraordinary general meeting is perfectly valid, yet may be oppressive, as held in Needle Industries (India) Ltd v. Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC): (1981) 51 Comp Cas 743 (SC). In the present case, admittedly, the company being wholly held by the petitioners and the second respondent, belonging to the same family, is nothing but a family company. The second petitioner has been a director since the very inception of the company and, therefore, in my view, the removal of second petitioner is oppressive, as held by this Board in a number of decisions, involving family companies and companies in the guise of quasi-partnership and further on equitable consideration depending upon the facts of a case and granting appropriate relief under Section 397 read with 402 so as to put an end to the matter complained of.