2017 (10) TMI 1367 - Tri - Companies Law

Breach of trust by trustee by selling the assets of the Company - sale of immovable property - value of the property and the buildings of the R1 company when it was sold to the R7 Company - Held that - Respondents 2 to 6 have sold their entire shareholding to the R7 Company. They have also sold the properties shown in the last available balance sheet for the year 31.03.2001 of the 1st Respondent Company. All these points have been, at length, discussed above. Both the petitioners and the Respondents have not produced any documents or the accounts of the R1 Company for the subsequent years which could clearly indicate clear financial position of the R1 Company. To enable this Tribunal to arrive at a decision based on facts, it is hereby ordered; 1. That an independent Auditor may be appointed, through mutual consent among the parties, to arrive at the value of the property and the buildings of the R1 company when it was sold to the R7 Company, (as on 31.10.2011 in terms of the sale deed attached with the petition). The auditor may also ascertain whether the proceeds have been brought into the books of R1 Company. The independent auditor will also update the accounts of the Company from 01.04.2011 onwards till the current date to ascertain the factual and financial position, with the comments, if any loss has been caused to the 1st Respondent Company by the Respondents 2 to 7, and if so, to quantify the same. 2. A Practicing Company Secretary may also be appointed through mutual consent among the parties to verify whether the procedures and the practices required to be followed in compliance to the Companies Act and various other rules have been followed while selling the shares of R2 to R6 together with the sale of the R1 Company s assets to R7. 3. The Practicing Company Secretary may also provide the details regarding shareholding pattern in the R1 and R7 Companies together with the particulars of their Board of Directors at the time when the assets of the Company and the shares held by respondents No. 2 to 6 were sold/transferred to Respondent No. 7. 4. The independent Auditor and Practicing Company Secretary may submit their reports within two months after their date of appointment. 5. In case, the petitioners and Respondents are unable to arrive at a consensus for appointing an independent auditor and Practicing Company Secretary the parties may approach this Tribunal for their appointments. 6. The fees to be paid to the independent auditor and the Practicing Company Secretary shall be borne by the R1 Company.

Summary

Issues Involved:
1. Validity of share allotment and transfer.
2. Compliance with Articles of Association and Companies Act.
3. Fiduciary duty and quasi-partnership nature.
4. Legality of the sale of company assets.
5. Financial mismanagement and misappropriation of funds.
6. Requirement for investigation and reconstitution of the board.

Detailed Analysis:

1. Validity of Share Allotment and Transfer:
The petitioners contended that the shares allotted to the second respondent were done without payment in cash, which was denied by the respondents. The petitioners argued that 12,180 equity shares were allotted to Late Mr. M.A. Shanmugam for consideration other than in cash in lieu of property transfer, but the sale deed was never executed. The respondents claimed the shares were allotted for valuable consideration and denied any irregularities.

2. Compliance with Articles of Association and Companies Act:
The petitioners alleged that the increase in authorized, issued, and paid-up capital was done without notice to other members, violating Section 81 of the Companies Act, 1956. They also claimed that the sale of shares by respondents 2 to 6 to respondent 7 was against the Articles of Association, which required offering shares to existing shareholders first. The respondents contended that proper notices were issued and resolutions passed, denying any violation of the Articles of Association.

3. Fiduciary Duty and Quasi-Partnership Nature:
The petitioners argued that the company was a quasi-partnership, and the directors owed a fiduciary duty to the members. They claimed that the second respondent, being the eldest family member, was trusted to manage the company for the benefit of all. The respondents denied the existence of any fiduciary duty and argued that the company was a separate legal entity, not a quasi-partnership.

4. Legality of the Sale of Company Assets:
The petitioners contended that the sale of company assets, including land and buildings, to respondent 7 was done without proper authorization and at a price much lower than the book value, causing loss to the company. They argued that no special resolution was passed, and the sale was done surreptitiously. The respondents claimed the sale was legal, valid, and necessary to repay loans and avoid winding up. They denied any mismanagement or fabrication of accounts.

5. Financial Mismanagement and Misappropriation of Funds:
The petitioners alleged financial mismanagement, including non-filing of balance sheets, fabrication of accounts, and misappropriation of funds by respondents 2 to 6. They argued that the company's financial crisis was fabricated to justify the sale of assets. The respondents denied these allegations and stated that the loans were necessary and properly accounted for.

6. Requirement for Investigation and Reconstitution of the Board:
The petitioners sought an investigation into the company's affairs, reconstitution of the board, and setting aside the sale of shares and assets. They argued that the respondents' actions were oppressive and prejudicial to minority shareholders. The respondents opposed the investigation, claiming transparency in the company's affairs and denying any need for reconstitution.

Judgment:
The Tribunal ordered the appointment of an independent auditor and a practicing company secretary to ascertain the value of the company's property and buildings at the time of sale, verify compliance with the Companies Act, and update the company's accounts. The reports were to be submitted within two months, and the fees for the auditor and company secretary were to be borne by the company. The matter was to be placed before the bench after the receipt of the reports for further decision.