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TMI Blog2016 (7) TMI 476X X X X Extracts X X X X X X X X Extracts X X X X ..... nd State Bank of India. Dena Bank filed an application before the DRT for recovery of money against a company by name Akkammal Steels Private Limited, which was also held by the members of the very same family. In the said case, the present company was impleaded as the fourth respondent. There was yet another application by State Bank of India against G.K.Alloy Steels Private Limited for recovery of money. The proceedings under the SARFAESI Act were also taken against Akkammal Steels Private Limited. A petition in C.P.No.70 of 2002 was filed against the company in question for winding up. By an order dated 22.3.2006, the Company Court ordered winding up. Therefore, there was a dire necessity for procuring finances. Hence, the argument that there was no necessity to sell the properties, is completely misconceived. The Directors were actually facing an emergency to save the company from being wound up. The appellant, who was mostly out of India, does not appear to have contributed anything to save the company. In the proceedings before the DRT, he was actually set ex parte. The bank could not even serve notices on him. Therefore, the Company Law Board was right in holding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amy resigned from Directorship on 4.7.2001 and in his place E.Gopalakrishnan was appointed as an Executive Director. The registered office of the company was shifted on 4.7.2001 and it appears that in an Annual General Meeting held on 28.9.2001, a Special Resolution was passed, inserting certain restrictive Clauses in the Articles of Association. 5. It appears that there was another company by name Akkammal Steels Private Limited, which was also closely held by the members of the same family. Both these companies namely Akkammal Steels Private Limited as well as G.K.Alloys Steels Private Limited had borrowed money from Dena Bank and State Bank of India. Dena Bank filed O.A.No.2277 of 2001 on the file of the Debts Recovery Tribunal-I, Chennai against Akkammal Steels Private Limited and its Directors K.Narayanaswamy and K.Venkatesh, for recovery of a total amount of ₹ 7,13,53,075.76/- and for the sale of the mortgaged and hypothecated properties as described in Schedules A to E of the Original Application. Thereafter, the matter got transferred to the Debts Recovery Tribunal, Coimbatore and renumbered as T.A.No.499 of 2002. In the said Application, G.K.Alloy Steels Private L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10. Thereafter, a Board Meeting was convened on 18.6.2007 for convening an Extraordinary General Body Meeting for the sale of the land of an extent of 3.29 acres. The Extraordinary General Body Meeting was convened on 12.7.2007 and the General Body approved the sale. 11. Thereafter, a Development Agreement was entered into on 23.5.2008 between the company and the sons of K.Narayanaswamy. Upon coming to know of all these developments, the appellant in the first appeal, filed a petition in C.P.No.7 of 2009 on the file of the Company Law Board under Sections 397 and 398 of the Companies Act, 1956, praying for the following reliefs:- (i) to declare the sale deeds dated 9.12.2005, 20.12.2005 and 21.7.2005 executed in favour of the two sons of Narayanaswamy as illegal, non est and void in law; (ii) to set aside all Memoranda of Understanding, deeds of Power of Attorney, Agreement entered into by the company and Directors in relation to the sale and joint development of the land of an extent of about 10 acres in Chinnavedampatti Village, Coimbatore; (iii) to direct an investigation into the affairs of the company and surcharge the respondents to make good the loss caused to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw Board took the main petition in C.P.No.7 of 2009 itself for hearing and framed four issues for consideration. They are: (1) Whether the affairs of the company were being conducted in a manner oppressive of one shareholder and prejudicial to the interest of the company ? (2) Whether the sale of 6.3 acres of land was liable to be set aside ? (3) Whether the Joint Development Agreement was liable to be set aside ? and (4) Whether the Directors were liable to be surcharged ? 15. After hearing all the parties, the Company Law Board passed a final order in C.P.No.7 of 2009 on 10.6.2011, (1) rejecting the prayer of the appellant herein for setting aside the sale deeds dated 9.12.2005, 20.12.2005 and 21.7.2005; (2) rejecting the prayer of the appellant herein for setting aside the MOUs, Powers of Attorney Agreements and Joint Development Agreement; (3) rejecting the prayer of the appellant herein for appointment of a Management Committee. However, the Company Law Board granted a limited relief, directing the Directors to remit a sum of ₹ 20 lakhs to the account of the Company within six months from the date of the order, failing which, they will be liable to pay int ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... K.Narayanaswamy, K.Balasundaram and K.Venkatesh. Since the appellant Dr.K.Balasundaram already had 5,185 shares and since he will be entitled to about 4,715 shares (1/3rd of 14,147 shares), his share capital should come up to 9,900 Equity Shares. 20. The grievances of the appellant in Company Appeal No.15 of 2011, were (1) that no Board Meeting or General Body Meeting were ever held; (2) that no notices of any of those meetings were served upon the appellant; (3) that valuable properties were sold unnecessarily without there being any necessity; (4) that the sales were fraudulent in as much as they were made in favour of Narayanaswamy's sons for a consideration much lower than the market value; and (5) that the company cannot enter into any Joint Development Agreement with a Real Estate Developer, when the Memorandum and Articles of Association do not permit the company to engage in such business. 21. It is the further contention of the appellant, that the shares held by the parents were never represented in the decision making process. The company was a Public Limited Company and it was only in the Annual General Meeting held on 28.9.2001 that the Articles were amended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere incorporated in the Articles. Therefore, the Company Law Board was right in holding in paragraph 10 of its order that the company regained its status as a private limited company with effect from 13.12.2000. 25. Keeping the above background in mind, if we test the validity of the first contention, it can be seen that the main or only act of oppression that the appellant alleged against the majority was the sale of the company's property. But, as rightly contended by the respondents and as rightly accepted by the Company Law Board, Section 293(1)(a) of the Act is a complete answer. Under the said provision, it is only the Board of Directors of a public company or of a private company, which is a subsidiary of a public company, which cannot sell or dispose of the company's property without the consent of the company in a general meeting. Since the company in this case is a private limited company, there was no necessity to convene a general meeting for this purpose. 26. As a consequence, even assuming that no notices of the general body meetings were ever served on the appellant, the same would not vitiate the sale that did not require the consent of the general bod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demonstrated that the judgment of the Company Law Board was given in a very cursory and cavalier manner. The Board has not gone into real issues which were germane for the decision of the controversy involved in the case. The High Court has rightly gone into the depth of the matter. As already stated the controversy in the case revolved around alleged allotment of additional shares in favour of Ramanujan and whether the allotment of additional shares was an act of oppression on his part. On the issue of oppression the finding of the Company Law Board was in favour of Prathapan i.e. his impugned act was held to be an act of oppression. The said finding has been maintained by the High Court although it has given stronger reasons for the same. We find no merit in the argument that the High Court exceeded its jurisdiction under Section 10F of the Companies Act while deciding the appeal. Therefore, unless the appellant establishes that the finding of fact recorded by the Company Law Board was perverse, it is not possible for me to dislodge the finding recorded by the Company Law Board, which I have extracted above. But unfortunately, the appellant has not been able to demonstrate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept the notices sent through 'certificate of posting' and it cannot be presumed that the addressee had the knowledge of the meeting. 32. Therefore, it is contended by the learned counsel, that the failure of the respondents to produce the dispatch register to show that they sent the notices as required under the Act, was fatal to their case. 33. But, I do not think that the above decisions are of any assistance to the appellant. As I have pointed out earlier, the company in question was a private limited company at the time when the sale transaction took place. Therefore, even assuming that no notices were issued for the General Body Meetings, such failure would not vitiate the sale transaction that could have been validly approved in the meeting of the Board of Directors. Hence, the first ground of attack to the order of the Company Law Board cannot be sustained. CONTENTION 3: 34. The third ground of attack of the appellant to the order of the Company Law Board is that till the Registrar of Companies was intimated of the decision about the change of status of the company from a public limited company to a private limited company, the company was required to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich the Annual General Meeting should have been held; and (ii) that a Director vacates his office at the latest on the date of which an Annual General Meeting could have been called as required by Section 166 and that though the defacto doctrine will save the decisions taken by Directors after they vacated the office, it will not clothe his presence with any right to remain in the office of de jure. 39. In any case, the company is actually a family company. No other member of the family nor any other Director has objected to the sale transaction that forms the foundation of the case of the appellant. When none of the shareholders and none of the Directors oppose the transaction that were approved in the meetings of the Board, the transactions may be saved by the Doctrine of Indoor Management in so far as third parties are concerned. 40. In the case of MRF Ltd. v. Manohar Parrikar [(2010) 11 SCC 374] the Court discussed the concept of indoor management. The doctrine of indoor management is in direct contrast to the doctrine or rule of constructive notice, which is essentially a presumption operating in favour of the company against the outsider. It prevents the outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so held by the members of the very same family. In the said case, the present company was impleaded as the fourth respondent. There was yet another application by State Bank of India against G.K.Alloy Steels Private Limited for recovery of money. The proceedings under the SARFAESI Act were also taken against Akkammal Steels Private Limited. A petition in C.P.No.70 of 2002 was filed against the company in question for winding up. By an order dated 22.3.2006, the Company Court ordered winding up. Therefore, there was a dire necessity for procuring finances. Hence, the argument that there was no necessity to sell the properties, is completely misconceived. 44. The next contention is that the sale transactions were fraudulent in nature and that they were entered into with the son of one of the Directors for a consideration lesser than the market value. 45, It is true that when the property of a company is sold in favour of a close relative of one of the Directors, the transaction is prone to be viewed with some element of suspicion. This is due to the fact that the Directors are obliged to avoid conflict of interests and keep the interests of the company far above that of their o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SARFAESI Act. In other words, the sale transactions were entered into at a time when the company was in dire financial strait. If these transactions had not been entered into, the Official Liquidator would have taken over the assets of the company and sold them in public auction. This important aspect has to be kept in mind before we scan the sale transactions with an eye of suspicion. 49. The main reason as to why the appellant is attacking the sale transactions is that the sale consideration paid thereunder was far less than the market value, as reflected in the register of guidelines maintained in the office of the Registrar. 50. But, as rightly pointed out by the respondents, a Full Bench of this Court held in Sakthi Co. Vs. Shree Desigachary [(2006) 2 CTC 433], that the guideline value contained in the basic valuation register maintained by the Revenue Department for the purpose of collecting stamp duty has no statutory base or force and that it cannot form a foundation for determining the market value of a property. 51. Therefore, the appellant cannot succeed merely by pointing out (i) that the guideline value of the property was much more than the sale consid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n or situation which involves the company or its business undertaking and also the individual holdings of its members. Therefore, the upshot of the above discussions is that the Directors are in a position of a trust. They must confirm to the probity and their conduct should be above suspicion. 55. But in the case on hand, the Directors were actually facing an emergency to save the company from being wound up. The appellant, who was mostly out of India, does not appear to have contributed anything to save the company. In the proceedings before the DRT, he was actually set ex parte. The bank could not even serve notices on him. Therefore, the Company Law Board was right in holding that the sale transactions are not proved to be fraudulent, warranting an inference of oppression and mismanagement. Hence, the fifth contention is also rejected. Contention-6 (joint development business not permitted) 56. The sixth ground of attack to the order of the Company Law Board is that the company cannot enter into any Joint Development Agreement with a Real Estate Developer, when the Memorandum and Articles of Association do not permit the company to engage in such business. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive to objects specified. If the object is not within the competence of the Company, the Directors relying upon Art. 93 (t) cannot expend the funds of the Company for achieving that object. The primary object of the Company is to carry on life insurance business in all its branches, and donations of the Company's funds for the benefit of a trust for charitable purposes is not incidental to or naturally conducive to that object. There is in fact no discernible connection between the donation and the objects of the Company. Undoubtedly the Memorandum of Association has to be read together with the Articles of Association, where the terms are ambiguous or silent. There is however no ambiguity in the relevant terms of the Memorandum of Association. Clause III of the Memorandum deals with the objects, and powers of the Company in language which is reasonably plain. The Articles may explain the Memorandum, but cannot extend its scope. Sub- clause (v) merely authorises the Company to do all such other things as are incidental or conducive to the attainment of the above objects or any of them'. The clause merely sets out what is implicit in the interpretation of every Memora ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 61. In V.S.Krishnan and others v. Westfort Hi-tech Hospital Ltd., [(2008) 3 SCC 363], the Supreme Court listed out of the circumstances when oppression would be made out, as follows:- From the above decisions, it is clear that oppression would be made out: (a) Where the conduct is harsh, burdensome and wrong. (b) Where the conduct is mala fide and is for a collateral purpose where although the ultimate objective may be in the interest of the company, the immediate purpose would result in an advantage for some shareholders vis- `-vis the others. (c) The action is against probity and good conduct. (d) The oppressive act complained of may be fully permissible under law but may yet be oppressive and, therefore, the test as to whether an action is oppressive or not is not based on whether it is legally permissible or not since even if legally permissible, if the action is otherwise against probity, good conduct or is burdensome, harsh or wrong or is mala fide or for a collateral purpose, it would amount to oppression under Sections 397 and 398. (e) Once conduct is found to be oppressive under Sections 397 and 398, the discretionary power given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder Section 397 or 398, as held by this Court in T.Vinayaka Perumal v. T.Balan [(2011) 1 Comp.LJ 74]. 65. In Raghunath Swarup Mathur v. Har Swarup Mathur [(1970) 40 Comp. Cases 282], it was held in paragraph 9 of the judgment, as follows: Section 397 of the Act undoubtedly empowers this court to make such orders as it thinks fit but only with a view to bringing to an end the matters complained of . The matters complained of must be proved to establish : (a) that the company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members ; and (b) that to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. It is, therefore, an essential prerequisite for a petitioner under Section 397 of the Act to prove that, apart from any prejudice to the interests of members, a winding up order would be justified in equity. Although, grounds of justice and equity elude categorisation and must necessarily be left to be decided on the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmitted by the Company Law Board is that the amount of ₹ 20 lakhs was arrived at only arbitrarily. Therefore, in normal circumstances, the surcharge order passed against the appellants in appeal No.19 of 2011 is liable to be set aside. 72. But, as seen from the facts of the case, the fight is actually between the members of the same family. Though disputes between the directors or shareholders inter se, in relation to an incorporated company, have to be resolved within the parameters of the Company Law, the Court cannot lose sight of the fact that in closely held companies, the disputes largely assume the nature of a claim for partition. Parties to such disputes, when they are in an advantageous position, invoke the provisions of the Companies Act, 1956 to retain the benefits and privileges that they enjoy at the time of commencement of the disputes. But, the others project the disputes from family perspectives and Courts have to strike a balance in such disputes. 73. Therefore, I am of the view that the order for surcharge passed by the Company Law Board, though not strictly in accordance with law, was intended to strike a balance and to provide an equitable relief. He ..... X X X X Extracts X X X X X X X X Extracts X X X X
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