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2004 (9) TMI 672 - Board - Companies LawValidity of the extraordinary general meeting held on 17-5-2002 - Allegations of misappropriation of funds by the second respondent - Legality of the removal of the second petitioner as a director -manipulation and false documentation - Claims regarding unpaid remuneration - Allegations of diversion of business by the second respondent - HELD THAT - 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 his fiduciary responsibilities for the benefit of the Company in further allotment of shares. There exist 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. It is not under dispute that the balance sheet and profit and loss account of the Company were approved and adopted since the very incorporation of the Company by the members and the Board of directors including either of the petitioners till their exclusion from the management of the Company in May 2002. Nevertheless the petitioners having failed to exercise due diligence before approving the accounts at the relevant point of time and having found that the petitioners are found guilty of negligence and acquiescence of the alleged wrongful acts prior to their removal from the post of director cannot be favoured by way of granting any relief in this behalf. The claim of the petitioners towards their remuneration since April 2002 not being disputed is justified. On account of the foregoing conclusions the following directions are given - (i)The second respondent shall out of 12000 equity shares held in his name transfer 5267 shares in favour of the first petitioner and 1466 shares in favour of second petitioner maintaining parity in tune with article 5(a) of the Articles of Association of the Company. (ii)The Board of directors of the Company shall be reconstituted by the petitioners and the second respondent with immediate effect while the third respondent simultaneously shall cease to be a director of the Company. (iii)The management of the business of the Company shall vest in the Board of directors who may exercise all such powers and Company all things within the framework of the Act. The Articles of Association of the Company shall suitably be amended. (iv)The Company shall pay the remuneration of the petitioners since April 2002 at the rate of 1, 30, 000 per annum for the first petitioner and at 1, 39, 000 per annum for the second petitioner. (v)M/s. Rao Gopal Chartered Accountants Chennai are appointed to scrutinize all payments and receipts on account of the Company with reference to the books of account financial statements bank statements vouchers and any other records of the Company which may be found necessary for the period between 1-4-2002 and 31-8-2004 and also take into account the submissions of the petitioners and the second respondent so as to ascertain whether any money of the Company has been misappropriated by the second respondent. If so the second respondent shall reimburse the misappropriated amount with interest at the rate of 10% simple in favour of the Company within 30 days of receipt of the report from M/s. Rao Gopal whose remuneration shall be borne by the Company. While all the interim orders are vacated the Board of Directors will decide about use of the Maruti Car now in possession of the first petitioner. The company petition was disposed of with no order as to costs.
Issues Involved:
1. Exclusion from management. 2. Illegal allotment of shares. 3. Illegal removal of directors. 4. Illegal appointment of directors. 5. Financial mismanagement and manipulation of records. 6. Misappropriation and diversion of funds. Summary: 1. Exclusion from Management: The petitioners, holding more than one-tenth of the total number of members of M/s. Best Vestures Trading Private Limited, filed a company petition u/s 397 and 398 read with section 402 of the Companies Act, 1956, alleging their exclusion from the day-to-day affairs and management of the company. 2. Illegal Allotment of Shares: The petitioners contended that the second respondent, as Managing Director, illegally allotted 5,900 equity shares in his favor and 3,800 shares to the second petitioner in December 1998, and 6,100 equity shares in March 2000 without issuing shares to the petitioners. The allotments were made without holding any Board meeting or obtaining consent from the petitioners, contrary to the Articles of Association. The second respondent argued that the allotments were made with the knowledge and consent of the petitioners and were reflected in the annual returns signed by the second petitioner. The judgment concluded that the allotments violated the Articles of Association and were not supported by any consideration, thus constituting an act of oppression. 3. Illegal Removal of Directors: The petitioners alleged that the second respondent fabricated records to show that an extraordinary general meeting was held on 17-5-2002, removing the second petitioner from the office of director and co-opting the third respondent as a director. The judgment found that the removal of the second petitioner did not comply with the mandatory requirements of section 284 of the Companies Act, such as serving a special notice and holding a valid Board meeting. The removal was deemed illegal and oppressive. 4. Illegal Appointment of Directors: The appointment of the third respondent as a director was challenged on the grounds that no valid extraordinary general meeting was held on 17-5-2002. The judgment invalidated the appointment due to the lack of compliance with statutory requirements and the absence of a valid Board meeting. 5. Financial Mismanagement and Manipulation of Records: The petitioners accused the second respondent of manipulating and falsifying the company's books of account and financial records. The judgment noted discrepancies in the company's financial records, such as unexplained cash withdrawals and discrepancies between bank statements and the company's ledger. The judgment directed an independent audit to scrutinize the company's financial transactions. 6. Misappropriation and Diversion of Funds: The petitioners alleged that the second respondent misappropriated funds from the company's receivables and diverted them for personal benefits, including the purchase of a flat. The judgment found that the second respondent failed to justify the cash withdrawals and fund transfers, warranting an independent audit to ascertain any misappropriation. The judgment directed the second respondent to reimburse any misappropriated amount with interest if found guilty. Order: The judgment directed the second respondent to transfer 5,267 shares to the first petitioner and 1,466 shares to the second petitioner, maintaining parity as per the Articles of Association. The Board of directors was to be reconstituted, and the third respondent was to cease being a director. The company was ordered to pay the petitioners' remuneration since April 2002. An independent audit was to be conducted to scrutinize the company's financial transactions, and any misappropriated amount was to be reimbursed by the second respondent with interest. The company petition was disposed of with no order as to costs.
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