1998 (6) TMI 581 - Board - Companies Law

Summary

Issues Involved:
1. Allegations of oppression and mismanagement.
2. Diversion of company funds.
3. Proposed increase in share capital.
4. Alleged fictitious liabilities and payments.
5. Adequacy of profits and dividend payments.
6. Appointment of Managing Director.
7. Issuance of right shares.

Detailed Analysis:

1. Allegations of Oppression and Mismanagement:
The petitioners, holding about 11% shares, alleged oppression and mismanagement under sections 397/398/402 and 403 of the Companies Act, 1956. They cited various instances of alleged siphoning of funds and oppressive conduct by the second respondent, the Chairman of the company. The petitioners sought relief including the supersession of the Board of Directors and the appointment of their nominees on the Board.

2. Diversion of Company Funds:
The petitioners alleged that the second respondent diverted funds for personal gain through various means, such as:
- Opening benami firms in the names of clerks and using these firms to siphon funds.
- Paying commissions to employees unnecessarily.
- Not making actual salary payments to employees while showing full payments in the books.
- Selling used oil, scrap, and spare parts without accounting for the proceeds.

The respondents denied these allegations, providing explanations for each. For instance, they stated that the firm Shri Ram Das Trailers was not a benami but a legitimate business, and commissions were paid as part of an incentive scheme during market slackness.

3. Proposed Increase in Share Capital:
The petitioners contended that the proposed increase in share capital was not bona fide and aimed at reducing their shareholding below 10%, thereby disqualifying them from filing petitions under section 397/398. The respondents justified the increase, stating it was for modernisation and working capital needs, as advised by their bankers.

4. Alleged Fictitious Liabilities and Payments:
The petitioners claimed that the company showed fictitious debts and made payments against these non-existent debts, citing an example of a payment to one Shri D. Ashok Kumar. The respondents clarified that these were legitimate liabilities, such as unsettled advances for vehicle repairs and deposits from shareholders and the public.

5. Adequacy of Profits and Dividend Payments:
The petitioners argued that the profits did not commensurate with the turnover, suggesting siphoning of funds. They also complained about inadequate dividends. The respondents explained that the profit margins were fixed by the manufacturer, and the dividend rates were decided by the Board based on various factors. The court found no evidence of fund siphoning based on the audited accounts.

6. Appointment of Managing Director:
The petitioners alleged that the second respondent manipulated the appointment of his son-in-law as Managing Director to consolidate control. The respondents countered that the appointment was in accordance with the Articles of Association and approved by the general body. The court found no grounds to interfere with the appointment.

7. Issuance of Right Shares:
The petitioners opposed the right issue, claiming it was unnecessary and aimed at diluting their shareholding. The respondents produced evidence of the need for additional funds for modernisation and working capital. The court found the issuance of right shares justified and noted that all shareholders, including the petitioners, had subscribed to the shares. The restraint order on the right issue was vacated, with liberty given to the petitioners to apply for a refund if desired.

Conclusion:
The court dismissed the petition, finding that the petitioners had not substantiated their allegations with sufficient evidence. The explanations provided by the respondents were deemed convincing. The court suggested that the respondents consider purchasing the petitioners' shares at a reasonable price to avoid future litigation, given the family relationship between the parties. No order as to costs was made.