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TMI Blog2010 (4) TMI 623X X X X Extracts X X X X X X X X Extracts X X X X ..... o understand as to how Board could have arrived at a conclusion that the petitioners had succeeded in showing that they were holding 10 per cent equity shares and entitled to maintain a petition under section 398 before it. The findings regarding the existence of the so called share certificates produced on behalf of respondent Nos. 2 to 5 also ought not to have been accepted by the Company Law Board in view of the serious allegations that there were hundreds of signed blank share certificates in existence from the time when the company was under the control of private co-promoters. This should have been reason enough for the Company Law Board to have directed the petitioners to first approach the proper forum for correcting the register of members. The appeal is thus allowed - COMPANY APPEAL (SJ) NO. 1 OF 1998 - - - Dated:- 30-4-2010 - RAMESH KUMAR DATTA, J. Umesh Prasad Singh and Rajeev Ranjan Prasad for the Appellant. Nilotpal Ganguli and Anand Priyadarshi for the Respondent. JUDGMENT 1. Heard learned counsels for the appellants and for respondent Nos. 2 to 5. 2. The appellants have come to this court against the judgment and order dated 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been taken and the criminal proceedings are pending in the Court of Judicial Magistrate. It is the further case of the appellants that in 1990 there were serious allegations of misappropriation of funds and gross mismanagement of the affairs of the company against each other by the two whole-time directors as a result of which the board of directors appointed M/s. Mitra Kundu and Basu, a reputed firm of chartered accountants of Kolkatta to conduct an special audit into the affairs of MSPL. In their report it was found that there was gross mismanagement and misappropriation of company s money and assets by both the executive director and the managing director. It was also found that instead of contributing in cash the promoters share of the capital, they had made fictitious and imaginary credit adjustments to the extent of nearly Rs. 30 lakhs to show contribution to the equity capital of the company. Company Petition No. 61 of 1992 was filed under section 398 of the Companies Act, 1956, by appellant No. 1 before the Company Law Board, Principal Bench, New Delhi against Magadh Spun Pipe Ltd., Shri Pradeep Sancheti and Shri V. S. Bharaktiya and ultimately by order dated 24-8-1993, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was pointed out that these petitioners were associates of Shri Pradeep Sancheti, the private co-promoter. Under the joint venture agreement the private promoter was required to contribute 25 per cent of the equity shares and the petitioners claimed to hold along with Pradeep Sancheti 25 per cent and more of the equity shares of the company and not on their own. It was further pointed out that the petitioners had no independent existence apart from their said co-promoter. It was stated that in view of the special audit conducted by the aforesaid chartered accountant it was established that the private promoters including these petitioners had not contributed to the equity shares as claimed by them rather false, fictitious and imaginary credit entries were made in their favour even before the issue of the prospectus by the company. Accordingly, it was prayed by the appellants that firstly genuineness of the claim of the petitioners to hold more than 10 per cent equity shares of the company had to be determined before any other issue was taken up. 7. The petitioners in reply to the aforesaid stand reiterated that they had paid the entire share application money by account payee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person was entered in the register as a member; and ( d )the date at which any person ceased to be a member : Provided that where the company has converted any of its shares into stock and given notice of the conversion to the Registrar, the register shall show the amount of stock held by each of the members concerned instead of the shares so converted which were previously held by him. (2) If default is made in complying with sub-section (1), the company and every officer of the company who is in default, shall be punishable with fine which may extend to five hundred rupees for every day during which the default continues." 12. On the strength of the aforesaid provisions, learned counsel contends that in order to be considered a member of the company a person must agree in writing to become a member of the company and his name should also be entered in the register of members. It is urged that once the contention was raised on behalf of the appellants that the petitioners before the Company Law Board were not the holders at least of one-tenth of the issued share capital of the company then the burden lay upon respondent Nos. 2 to 5 to show that they had agreed in wri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... randum, two essential conditions have to be satisfied to constitute a person as a member : (1) An agreement in writing to become a member, and (2) an entry on the register. These two conditions are cumulative. Both these conditions have to be satisfied and if both these conditions are not satisfied, the person in question cannot claim the status of a member. The position in the English Act is also almost identical." (p. 666) 14. It is further submitted by learned counsel that in view of the aforesaid position of law, it was incumbent upon the respondents to show that they were the shareholders holding one-tenth of the shares of the company as required under section 399 of the Companies Act before they would be eligible to file a company petition under section 398 of the Act. It is urged that they had woefully failed in showing that they satisfied either of the two requirements and mere production of the alleged share certificate in original could not be considered sufficient as nothing is to be found in the order regarding the distinctive share numbers which had been produced and the value of the shares underlying the share certificates. Thus, it could not be said that they wer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oney arose purely out of effecting the adjustment entries. We have been given to understand that the creditors of the company/other parties were paid off earlier by the proposed shareholders and hence, those sum of money were subsequently, treated as consideration sum for allotment of shares to them. The procedure adopted in this regard appears to be tenable provided the base entries, i.e., the bona fide of creditors/other parties account are proper and genuine. Here, it was not so. The creditors/other parties account which were squared off to represent consideration sum for shares are fictitious and imaginary as would be evident from the remarks made else where in our report. Moreover, no acknowledgement from the original party was found establishing the fact that they were paid off by the third party (proposed shareholder) on behalf of the company. Further no prior agreement/arrangement to the effect of this deal was there. In the light of the above, the consideration sum for shares as shown to have been contributed by way of cash/bank does not purport to be a bona fide one." 17. Learned counsel also contends that in the facts and circumstances of the case, the so c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not be lightly entertained. The applicants must show that they are making the same bona fide. In the present matter, it is urged by him that the bona fides were completely lacking and the petitioners were mere front-men of Shri Pradeep Sancheti who had indulged in massive manipulations and misappropriation of the funds of the company and against whom several legal proceedings including criminal proceedings had been instituted. Under such circumstances any such petition on his behalf ought not to have been entertained. In support of the said proposition learned counsel relies upon a decision of the Karnataka High Court in the case of Srikanta Datta Nara-simharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (P.) Ltd. [1991] 72 Comp. Cas. 211 , of which it has been held as follows : "A consideration of all these legal issues will necessarily take me to the detailed objections filed by the respondents. But the question is whether, on the facts of these cases, this court should go into the objections and determine the issues for consideration on merits. In my considered view, this petition could be disposed of on the preliminary issue, viz., whether the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that the court s power to exercise jurisdiction under section 397 or, for that matter, under section 398 cannot be defeated by mere technicalities, as observed by the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 : AIR 1981 SC 1298." (p. 231) 20. Learned counsel also refers to the fact that the Company Law Board ought to have applied the same standard in the matter of considering the company petition under section 398 filed by the appellants to the company petition filed by respondent Nos. 2 to 5. It is pointed out that the company petition filed by respondent Nos. 2 to 5 in 1993 as the front men of Pradeep Sancheti, was a counter blast to the company petition filed under section 398 by the appellants in 1992, but the company petition filed by the appellants was dismissed on the ground of pendency of various court cases between the parties, orders issued by various courts and action already taken and alternative remedies pursued in respect of matters on which prayers were made before them taking which into consideration the Company Law Board held that according to them, no case is made out for thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a facie evidence of the said fact in terms of section 164 and the original share certificates produced by them were also prima facie evidence of the title of the respondents to those shares. It is thus contended by him that in terms of the provisions of the Act, the Company Law Board has rightly relied upon those evidence in favour of these respondents. 24. Learned counsel also relies upon section 2(27) of the Act which is in the following terms : "2. (27) member , in relation to a company, does not include a bearer of a share-warrant of the company issued in pursuance of section 114 ;" 25. It is submitted by learned counsel that the definition of "member" is to be found in the said section 2(27) and not in section 41 of the Act which does not have any purport. Learned counsel relies upon a decision of the Karnataka High Court in the case of Srikanta Datta Narasimharaja Wadiyar v. Venkateswara Real Estate Enterprises (P.) Ltd. [1990] 68 Comp. Cas. 216 , in which it was held that a petition for relief from oppression and mismanagement filed under sections 397 and 398 of the Companies Act, 1956, is not to be thrown out on the sole ground that the petitioner s name i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssued equity share capital of the company, yet I do hot find any specific finding having been recorded by the Company Law Board in this regard. The entire matter has been dealt with in a vague and general manner on the basis of conjectures and surmises. There is absolutely no mention even of the fact as to the distinctive numbers and the value of the original share certificates which had been produced before the Company Law Board. The only reason for coming to such conclusion of holding at least 10 per cent share is that out of the total share capital of the company, the co-promoters were required to contribute 25 per cent of the shares and since the same is shown to have been contributed by the private promoters hence, it was presumed that the petitioners were holding at least 10 per cent shares. First of all, respondent Nos. 2 to 5, although they formed part of the co-promoters group but admittedly they had not taken up the entire shares which was to be subscribed by the co-promoters, hence even if for the sake of argument, it is assumed that the co-promoters had, as a matter of fact, and not merely by a paper transaction taken up 25 per cent of the shareholding in the company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of at least one-tenth share capital of the company, they could maintain a petition under sections 397 and 398 of the Act. In this regard I am in agreement with the view of the learned Single Judge of the Punjab High Court in Ved Prakash s case ( supra ), in which it was rightly held that an application under sections 397 and 398 of the Act can only be maintained by a person who is shown as member in the register of the company. 30. The decision of the Supreme Court in the case of J. P. Srivastava Sons (P.) Ltd. ( supra ), does not at all support the stand of the petitioners as in that case it was clearly found on the basis of the materials on the record that the petitioners were holders of shares and there were only issues with regard to trust, etc., involved and it was in such circumstance that the said observations were made. Those observations could not be used particularly in the present matter where serious allegations exist against the private co-promoters whose front-men evidently respondent Nos. 2 to 5 are; rather various litigations and criminal cases against the said private co-promoters are also pending in the courts. In such circumstance, no benefit could have ..... X X X X Extracts X X X X X X X X Extracts X X X X
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