9911796707
TMI Blog2005 (9) TMI 663X X X X Extracts X X X X X X X X Extracts X X X X ..... balances from the debenture holders and credi- tors; l failure to update the quantitative particulars and location of fixed assets and to carry out physical verification of all such fixed assets; l write-off of huge amounts as bad debts; l extending advances to the directors and other private companies, where the respondent-directors are interested as directors, in violation of the provisions of the Act; l improper charging of depreciation on the assets without meeting the requirements of the Act; and l failure to insure precious and expensive equipments causing huge loss to the Company. 2. Shri Arvind P. Datar, learned Senior Counsel, while initiating his arguments submitted that the Company was promoted in the year 1956 by late L.V. Prasad to carry on the business of film production. L.V. Prasad had two sons, viz., ( i) Ananda Rao, since deceased and survived by his wife, two sons and a daughter, who are the petitioners herein; and (ii) A. Ramesh, the second respondent and (iii) one daughter, viz., Gruha Lakshmi. The authorised capital of the Company prior to June, 2002 was ₹ 20,00,000 divided into 20,000 equity shares of ₹ 100 each and the paid-up ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 51,05,542 respectively sent by the Company. There is no justification for the unilateral and sudden refund of the amounts in favour of the petitioners. In the meanwhile, the board of directors allotted 1,32,594 equity shares on 20-9-2002 to the respondents group, being their entitlement, against the credit balances lying in their account and further allotted on 29-3-2003 the additional shares earmarked for the petitioners in favour of the respondents group, with intention of reducing the respondents to a minuscule minority of 2.88 per cent from 28.33 per cent originally held by them. This act of denying the rights shares to petitioners, while allotting the shares exclusively in favour of the respondents, apart from being mala fide, is a clear act of oppression on the part of the respondents. The powers to issue shares given to the directors are fiduciary powers, which should not be exercised for gaining in any manner for themselves. The Supreme Court held in Dale Carrington Investment (P.) Ltd. v. P.K. Prathapan [2005] 1 SCC 2121 that when powers of the board of directors are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference shares to the tune of over ₹ 15 crores, which could be redeemed, on successful implementation of the project by Prasad Media Corporation Ltd. It would have been beneficial to invest in equity shares of Prasad Media Corporation Ltd., as it would have been a permanent capital for the Company. The Company has further given counter guarantee to the tune of ₹ 54.50 crores for the loans extended to Prasad Media Corporation Ltd. by IDBI and Andhra Bank. These came to light on scrutiny of the annual report for the period ended 31-3-2003, which was placed at the annual general meeting held on 21-1-2004. If the project fails and the guarantee is invoked by the financial institution, the Company will be but to irreparable loss and hardship. Instead, if the IMAX Theatre Project succeeds, the entire profits will be reaped by the respondent Nos. 2 and 3 at the cost of Company. The IMAX Theatre Project could have been put up by the Company with its huge financial reserves and substantial profits in terms of the Government order issued by Government of Andhra Pradesh, thereby availing depreciation of ₹ 15 crores in the year of commencement itself. There is no explanatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts during all these years. The Company failed to reconcile the quantity of raw-film sold or received from the customers for processing with the quantity of final processed film and wastage. l The Company did not obtain confirmation of balances from the debtors and creditors, since they have already collected the amounts from the debtors. Thus, the outstanding balances due to the Company have already been realised, causing huge financial loss to the Company. l The Company failed to maintain a fixed assets register with an intention to suppress diversion of the assets of the Company. The fixed assets register has not been brought up-to-date. The respondents had removed many valuable machines and other assets of the Company and transferred them without any consideration to their own concerns, thereby creating resources for themselves. l The Company failed to collect its receivables promptly, but wrote off huge receivables as bad debts over a period of time, causing irreparable loss to the Company and its members. l The Company had appointed at the annual general meeting for the year ended 31-3-2000, the respondent Nos. 3 and 4 as the whole-time directors and the second re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdered for an investigation into the affairs of the company on finding that it blocked substantial funds in another company when the main object is not investment and diverted the project money to various bodies unincorporated etc. The directors are guilty of fraud, misfeasance and mis-conduct towards the Company and its members. Therefore, the CLB has adequate powers to order for an investigation under section 235, despite the petitioners do not have ten per cent shareholding of the Company. Furthermore, the petitioners have sought by way of an interim prayer for appointment of a chartered accountant to investigate the accounts, apart from one of the main prayers to surcharge the respondents based on the auditors report. Consequently, the CLB, invoking its jurisdiction under sections 402 and 403 can pass appropriate orders for effectively bringing back the diverted funds to the Company. 3. Shri Datar, learned Senior Counsel, while arguing the company application for impleadment of the proposed respondent Nos. 6 and 7 pointed out that the directors report dated 31-10-2001 forming part of the annual report for the year 2000-01 clearly indicates that the Company successfully par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghts of the parties by which the case of justice will not suffer as held in Binod Kumar Agarwal v. Ringtong Tea Co. (P) Ltd. [1995] 1 Comp. LJ 138 (CLB). Prasad Film Labs (Mumbai) Private Limited (PFLPL) is a wholly owned subsidiary of the Company. The Company acquired 10,000 equity shares of ₹ 100 each of PFLPL at a value of ₹ 1,95,54,221 reflecting a huge valuation of premium equivalent to over ₹ 1,85,00,000, when M/s. PFLPL suffered huge losses as at 31-3-2002 of ₹ 75,72,923 and ₹ 1,23,66,474 during the following year and carried huge bad debts amounting to ₹ 4.72 crores. There is no need for the Company to invest in the shares of the PFLPL, a loss making company. The Company failed to furnish particulars of its subsidiary company, viz., the proposed respondent No. 7 in its balance sheet in gross violation of section 212. It is, therefore, a ruse for siphoning of the Company s funds, through its wholly subsidiary company. The entire investments made in PFLPL must be recovered in the interests of the Company and its shareholders. The application for impleadment of the proposed Nos. 6 and 7 is in aid of the main prayer for investigation of the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res of the Company under the will of L.V. Prasad in favour of the respondent and his family members clearly indicate that the Company is not for the benefit of the family members of L.V. Prasad, but only of the second respondent and his family. The principles of limited partnership cannot be applied on the facts of the case, especially when the petitioners do not have any representation in the board of the Company and the second respondent always enjoyed the majority support in the Company. The alleged acts of oppression and mismanagement do not exist and the present proceedings are just to harass the respondents. The main grievance of the petitioners is that the rights shares have been exclusively allotted in favour of the respondents reducing the petitioners to a minuscule minority. The Company at a regularly and properly convened and conducted meeting increased the authorised share capital and the resolution passed increasing the capital was duly supported by the first petitioner. As on the date of allotment of the rights shares, the Company was a private limited company and there was no requirement of following the provisions of section 81 of the Act. In Dale Carrington In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs. Such a broad proposition of law would be inconsistent with the duty of a director vis- -vis the company and the settled law that the statutory duty of a director is primarily to look after the interest of the company as held in Sangramsinh P. Gaekwad s case (supra). The directors of a company are in a fiduciary position vis- -vis the company and must exercise their power for the benefit of the company, as concluded by the Supreme Court in Nanalal v. Bombay Life Assurance Co. AIR 1950 SC 172. This isolated incident is not enough for grant of any relief under section 397. It must be shown under section 397 as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 (SC) that the conduct of the majority shareholders is oppressive to the minority as members, which must be continuous on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the Company are being conducted in a manner oppressive to some of the members. The conduct must be burdensome, harsh and wrongful. These requirements are evidently missing in the present case. The Company during the period of L.V. Prasad was managed by the board of directors p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... umption may or may not be drawn on the facts and circumstances of case. The presumption may be drawn initially, but on a consideration of the evidence the court may hold the presumption rebutted and may arrive at the conclusion that no letter was received by the addressee that no letter was ever dispatched as claimed. There have been cases in the past, though rare, where postal service and even postal seals have been manufactured. u S. Narayanan v. Century Flour Mills Ltd. [1987] 1 Comp. LJ 25 (Mad.) - to show that it is not always safe to trust mere certificate of posting. It will only show that certain postal envelopes were put into the post office; mere posting by itself will not necessarily mean that there was service on the addressee concerned. When, on the facts, registered posts could be diverted and would not reach addressees, it was held highly risky to place reliance upon the mere certificate of posting. u Stridewell Leathers (P.) Ltd. s case (supra) to show that in case of despatch under postal certificates, a presumption may be drawn with regard to posting, but such resumption is rebuttable and that one will have to take into consideration the circumstances surrou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rained the petitioner Nos. 1, 3 and 4 from alienating their shares held in the Company, pending the original application filed by Indian Bank. The Debt Recovery Tribunal by yet another order dated 31-1-2002 restrained the petitioner Nos. 1, 3 and 4 from making any transfer of their shares in the Company or from receiving any payment of any dividend thereon. These restraint orders are still in force. It is, therefore, free from doubt that the additional shares would have been definitely attached by the DRT. Nevertheless, no additional shares could be allotted against the credit balances of the petitioner Nos. 2 and 4, in the absence of any application made by the petitioners with the Company. The DRT by its order dated 11-7-2003 required the second respondent to stop the payment of cheque issued in the name of the fourth petitioner for ₹ 1,25,20,931, representing the amount refunded by the Company, and thereafter, the proceeds of the cheque were handed over to the Recovery Officer of the DRT. The petitioners failed to make the payment in terms of the DRT order and, therefore, issued a recovery certificate against the petitioners. When the petitioners shares, are sold by the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different company under control of the third respondent were raised in the meetings of the board of directors of the Company held on 13-1-1997, 15-1-1997, 27-1-1997 and 20-2-1997 by the petitioners and appropriately explained by the board of directors. But the petitioners have filed the present company petition in the year 2003 with the very same grievances. u The Company is in the film industry which is a speculative one. The prospects of recovery of dues from film producers entirely depend upon the success or failure of the films at the box office. Therefore, the phenomenon of bad debts is a normal feature in the business of film processing. The quantum of written off debts, viewed in the contrast of turnover and volume of business running into crores of rupees each year cannot be considered huge , as contended by the petitioners. The Income-tax Department allowed such write off by the Company. The Company has been realising from time to time a part of the written off debts from the borrowers. When the Company was managed by the interim board under the chairmanship of a retire High Court Judge with two members of the petitioners group nominated on the Board they had raised th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct, which did not cause any prejudice to the Company. The claim of the petitioners that the depreciation must be charged in terms of section 205 read with section 350 and Schedule XIV of the Act is erroneous. The auditors in their report on accounts for the year ended 31-3-1999 did not qualify on the depreciation at the rate prescribed under the Income-tax Act. u The Company has a policy of taking out the insurance cover depending on the exigencies. The issue of non-insurance of the assets was raised by the petitioners at the relevant board meeting and discussed in regard to the fire accident. The loss resulted in the normal course of business. The non-insurance of the assets is an act of past and concluded one, which cannot be now challenged. According to the respondents, the entire events leading to the allotment of unsubscribed shares in their favour is on account of the undesirable behaviour and conduct of the petitioners. L.V. Prasad promoted and developed the Company. Ananda Rao, father of the petitioner Nos. 1, 3 and 4 was never allowed to interfere in the business of the Company. The second respondent took over the management after the demise of L.V. Prasad, but could ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... u Rohtas Industries Ltd. v. S.D. Agarwal [1969] 39 Comp. Cas. 781 (SC)- to show that to exercise the power under section 237(b), the existence of circumstances suggesting that the company s business is being conducted, as contemplated by clauses (i), (ii) and (iii ) must be made out by the parties. u Ashoka Marketing Ltd. v. Union of India [1981] 51 Comp. Cas. 634 (Delhi) - to show that if the parties invoking section 237(b) fail to make out the existence of circumstances justifying the formation of an opinion that there was fraud, misfeasance or mis-conduct on the part of the persons in the management of the company or towards the company or its members, the CLB will not order an investigation into the affairs, of the company. u Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P.) Ltd. [1983] 53 Comp. Cas. 493 (Ker.) to show that no investigation could be ordered merely because a shareholder feels aggrieved about the manner in which the company s business is being carried or when there is no evidence to establish prima facie case of misappropriation or there is evidence showing fraudulent write off of bad debts. u Modi Industries Ltd. v. Union of India [1982] 52 Comp. Cas. 589 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lication (CA 20/05) to implead the proposed respondent Nos. 6 and 7 pointed out that there are no pleadings on the alleged misappropriation of the Company s funds by the respondents group either in the company petition or rejoinder. All averments in relation to incorporation of the proposed respondent No. 6, implementation of the IMAX Theatre Project, investments made by way of preference shares in the proposed respondent No. 6, incorporated by the respondent Nos. 2 and 3 and the guarantee given by the Company securing the loans availed by the proposed respondent No. 6, not having been raised in the company petition, but only at the time of arguments cannot be gone into by the CLB. The respondents have not been afforded any opportunity to answer those charges ensuring the principles of natural justice, as envisaged in section 10E(5) of the Act. The petitioners have not pleaded regarding the investments made by the company in its subsidiary, being the proposed respondent No. 7 either in the Company petition or rejoinder and hence cannot be agitated at this belated stage. The plea that the balance sheet of the Company did not include the particulars of its subsidiary Company, is take ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 8(a) of the company application to amend the company petition including the proposed respondents 6 and 7 alone is not sufficient. The applicants have addressed arguments only for impleadment of the proposed parties but not on the remaining prayers. The respondent Nos. 2 and 3 are owning the proposed sixth respondent and therefore, the latter is not a necessary party to the present proceedings. Moreover, the proposed respondent No. 7 being a subsidiary of the Company need not be impleaded. The prayer is merely for impleadment of the proposed respondent Nos. 6 and 7, but no relief has been claimed against them and, therefore, they are not necessary parties. The application is misconceived, mala fide and an abuse of process, made with a view to delay the whole proceedings and, therefore, liable to be dismissed. 5. Shri Vedantham Srinivasan, learned Senior Counsel, representing the respondent Nos. 2 to 4 submitted : Late L.V. Prasad was producer and director of numerous films in Tamil, Telugu and Hindi, winner of Dadasaheb Phalke Award, doyen of Indian film industry and founder Managing Director of the Company. A statue of L.V. Prasad has been erected, in Andhra Pradesh and an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... their favour. The consent letters and certificates of posting produced by the petitioners are fabricated documents. The amounts due to the petitioners were returned to them in consultation with the auditors, which was not questioned till filing of the Company petition. The cheques sent to the petitioners by the Company were attached by the DRT and the proceeds were realised for the dues of Indian Bank. L.V. Prasad died in June 1994, leaving as will, which resulted in litigations between the petitioners and the respondents before a Single Bench and Division Bench of the Madras High Court and the Supreme Court, wherein the genuineness of the will was upheld. The petitioners making use of these litigations got the third petitioner inducted in the board of directors under the Chairmanship of a retired High Court Judge. The petitioners are parties to the decisions taken at the board meetings and in particular in relation to many of the contentious issues now raised including the increase in authorised capital, adoption of accounts, appointment of the auditors, writing off bad debts etc. Therefore, the petitioners are estopped by their conduct, waiver and acquiescence to reagitate th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the Income-tax Department. The Company used to take into consideration several factors, including chances of recovery or failure of pictures at the box office, relationship with the film producers etc., before writing off the bad debts. The statistics for the period from 1993 to 2003 would indicate that the quantum of bad debts written off is a minuscule percentage of either the networth or turnover or profitability of the Company. The petitioners ought to have come with clean hands to claim the equitable reliefs. The charges levelled by the petitioners must be specific so as to order for an investigation into the Company s affairs. The Company is well-managed and its turnover increased over one hundred times. The respondents meticulously followed the articles and the relevant provisions of the Act and no motive or lack of integrity can be attributed to the respondents. The petitioners failed to make out any case of oppression or mismanagement in the affairs of the Company. The prayers of the petitioners must be declined. 6. Shri Sankaranarayanan, learned counsel, while supplementing the arguments of Shri Vedantham Srinivasan, learned Sernior Counsel submitted : The thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sought certain clarifications on the accounts for the year ended 31-3-1993, and therefore, the agenda for approval of the accounts for the year ended 31-3-1993 stood adjourned to a future date. u At the board meeting held on 7-11-1995, certain details on the bad debts were called for, before adopting the accounts for the period ended 31-3-1993 and the wind power generating plant project was discussed. u At the board meeting held on 16-11-1995, while the accounts for the year ended 31-3-1999 were approved, a number of bad debts were written off, after taking the view point of all directors, including the third petitioner. u At the board meeting held on 29-11-1999 the agenda regarding writing off the bad debts was disallowed. u At the board meeting of 4-12-1995, the agenda regarding recovery of the equipments leased by the Company to M/s. Anand Cine Service came up for consideration and the directors decided to take up the issue after final decision of the court in the pending civil suit initiated by the Company against M/s. Anand Cine Service. u At the board meeting held on 9-12-1995, the board of directors including the third petitioner resolved that the resolution d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , third petitioner endeavoured to ascertain the in-house details of the Company and nothing else. u At the board meeting held on 10-5-1997, the draft accounts for the year ended 31-3-1996 were considered. Shri Shankaranarayanan, learned Counsel, while concluding his submissions reiterated that all the contentious issues which are being agitated before this Bench, were already raised, deliberated and appropriately dealt with by the board of directors, including the third petitioner. Hence, the very same issues ought not to be entertained. Shri Shankaranarayanan, learned Counsel, while opposing the application for impleading the proposed respondent Nos. 6 and 7, submitted that the annual return of the Company for the year 2000-01 clearly indicates that its directors would float a new company to implement the IMAX Theatre Project, but the petitioners, failed to raise their voice at the relevant point of time. The balance sheet for the years ended 31-3-2002 as well as 31-3-2003 discloses the details of the investments made by the Company in the proposed respondent No. 6. Thus the incorporation of the proposed respondent No. 6 by the respondent Nos. 2 and 3 and the investments ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o have been duly served in the ordinary course of post. The petitioners never made any demand for refund of the balances lying to their credit with the Company for the past 15 years, but the Company unilaterally refunded the monies without any reason by way of cheques, which are still not encashed. The proceedings between the petitioners and Indian Bank before the Debt Recovery Tribunal and the probate proceedings on account of the will executed by late L.V. Prasad have no bearing on the allotment of additional shares. Therefore, the petitioners must be allotted the rights shares offered by the Company. The principles enunciated by the Supreme Court in Dale Carrington Investment (P.) Ltd. s case (supra) have not been watered down in Sangramsinh P. Gaekwad s case (supra). Any allotment of shares for personal aggrandisement must be set aside. The petitioners have been holding 28 per cent of the equity shares of the Company, since the days of late L.V. Prasad and, therefore, the petitioners are legitimately entitled to the rights shares. The proposed respondent No. 6 is engaged in the film business in competition with the Company. No details in this behalf have been furnished to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... subscribers to the memorandum of association and articles of association of the Company, each subscribing one share of ₹ 100 each. L.V. Prasad and Ananda Rao, along with two others, were the first directors, who were to hold office till the annual general meeting of the Company in the year 1960. Prior to the impugned allotments, while the petitioners group was holding 28.33 per cent, the respondents group held 71.67 per cent of the paid-up capital of the Company. When the authorised capital was increased to ₹ 2,00,00,000 at the annual general meeting held on 6-6-2002, the resolution for the increase in authorised capital was seconded for adoption by the first petitioner, as borne by copy of the minutes dated 6-6-2002 of the annual general meeting of the Company. After giving effect to the increase in authorised capital, the Company offered 1,85,000 shares to all shareholders in proportion to their existing paid-up capital ratio. Accordingly, the Company had sent letters, among others, to the petitioners on 13-8-2002 offering 52,406 shares, viz., 22,921 shares to the first petitioner; 313 shares to the second petitioner; 23,216 shares to the third petitioner and 5,956 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t an inevitable presumption. The presumption may or may not be drawn. On the facts and circumstances of a case, the presumption may be drawn initially, but on a consideration of the evidence, the court may hold the presumption rebutted and may arrive at the conclusion that no letter was received by the addressee or that no letter was ever dispatched as claimed. There have been cases in the past, where postal certificates and even postal seals have been manufactured. The Supreme Court in M.S. Madhusoodhanan s case (supra) categorically held that service of notice by certificate of posting is not reliable and must be viewed with suspicion, when relationship between the parties is already embittered. This Board in Stridewell Leathers (P.) Ltd. s case (supra) held that in case of despatch under postal certificates, a presumption may be drawn with regard to posting. As such, presumption is rebuttable, but one will have to take into consideration the circumstances surrounding posting under postal certificates. Though, in the case of despatch under postal certificate a general presumption of posting could be drawn, as held in Akbarali A. Kalvert s case (supra), yet, such presumption would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. However, the petitioners reportedly chose to send the consent letters along with the applications dated 19-8-2002, after a delay of seven days under certificate of posting. There is no explanation as to why such of the essential documents involving valuable right of the petitioners must be sent under certificate of posting, more so, when all is not well between the parties. The petitioners litigating with the respondents in the common course of natural events, would have been diligent enough to send the applications for additional shares in a prudent way and not under certificate of posting. While at one point of time, it is reported that the petitioners sent the consent letters together with the applications by certificate of posting, it is contended at a later point of time that the consent letters were handed over in person to the second respondent by the second petitioner, followed by the letters sent under the certificate of posting to the Company. There is no material as to when and in whose presence the consent letters were handed over in person to the second respondent. The second petitioner, being wife of the first petitioner and considering the strained relationship ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on 6-6-2002 adopted a resolution for an increase in the authorised share capital from ₹ 20,00,000 to ₹ 2,00,00,000. The resolution for the increase in the share capital was seconded by the first petitioner for adoption by members of the Company. The share capital was increased to meet the commercial exigency of the Company as averred in the reply statement filed on behalf of the Company (para 5 at page 11). After giving effect to the increase in authorised share capital, the board of directors at the meeting held on 10-8-2002 approved the issue of further shares and offered 1,85,000 shares to all the shareholders in proportion to their existing holdings in the Company. Accordingly, the petitioners were offered 1,32,594 shares and the respondents 52,406 shares (22,921 shares to the first petitioner; 313 shares to the second petitioner; 23,216 shares to the third petitioner and 5,956 shares to the fourth petitioner), as borne out by the letters dated 13-8-2002 of the Company, thereby the directors not only satisfied the test of bona fides, but also acted with a proper motive, as laid down in Dale Carrington Investment (P.) Ltd. s case (supra ). All shareholders incl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lutely relevant to make a reference to the averments made in para 6.1.11 of the company petition to the effect that ...the petitioners, in an attempt to ferret out the truth, made a search of records at the office of the Registrar of Companies, Tamil Nadu, Chennai and came to know that the second respondent, viz., Shri A. Ramesh, had gone ahead and allotted a total of 1,32,594 equity shares to himself and his group on 20-9-2002 against various alleged credit balances lying in their account. Copy of the Return of Allotment (Form No. 2) dated 16-10-2002 filed by the company with the Registrar of Companies for the purported allotment of shares on 20-9-2002 is enclosed as Annexure A8. The search, which was made on 25-3-2003, reflected this position and hence the petitioners now have been reduced to a minuscule minority of 2.88 per cent if the shares so allotted to the respondents are also taken into account. These averments are not controverted either in the reply statement filed on behalf of the Company or at the time of arguments advanced by the learned Counsel representing the respondents. Furthermore, the petitioners in their rejoinder categorically pleaded that In fact, the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners. The respondent had already been with a restraint order by the Debt Recovery Tribunal attaching the shares held by the petitioners 1, 3 and 4 and prohibiting the respondent from transferring alienation of the said shares. The copy of the said order is filed as Annexure R-11. It is observed that the request of the second respondent for allotment of the additional shares against the amounts due to the petitioner Nos. 2 and 4 was not acceded to by the second respondent for the above given reasons. The civil suit in O.S. No. 680/1994 filed before City Civil Court at Madras against M/s. Anand Cine Services is for an order, inter alia, of mandatory injunction directing M/s. Anand Cine Services represented by its partner, being the first petitioner, to return the outdoor film shooting equipments and not for recovery of the outstanding amount of ₹ 1.40 crores reportedly due from the petitioners, as claimed by the Company. It is true that the petitioners have suffered a restraint orders made by the Debt Recovery Tribunal thereby the petitioner Nos. 1, 3 and 4 have been prohibited from transferring their shares held in the Company. This restraint order is in no way an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ra). However, it is obligatory on the part of the directors, in the light of the special circumstances which arose on account of the resolution passed at the board meeting held on 20-9-2002 granting some more time to bring in further share application money by petitioners, send a prior intimation in favour of the petitioners, before allotting the unsubscribed shares in favour of the respondents. This fiduciary duty of directors of the Company has been recognised by the Supreme Court in Sangramsinh P. Gaekwad s case (supra) thus : In an appropriate case, a fiduciary relationship may come into being having regard to the responsibility undertaken by the directors towards the shareholders by way of a special contract. The obligation becomes more onerous in the light of the fact that the allotment of 1,32,594 shares in favour of the respondents were already made not against any fresh share application money, but against the amounts lying to their credit with the Company. Furthermore, the Company had unilaterally returned the amounts due to the petitioners, without allotting the shares against the outstanding amounts due to them. Thus, the board of directors of the Company failed to tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... further shares in a closely held company at the detriment of a part of the shareholders is considered to be an act of oppression by this Board in Deepak C. Shriram s case (supra). This Board, in Binod Kumar Agarwal s case (supra) categorically held that whenever the further issue shares is found to be oppressive, the oppression to be redressed and in S.T. Ganapathy Mudaliar v. S.G. Pandurangan cancelled the allotment of additional shares made in a family company to certain shareholders in exclusion of others. In the present case, it is to be observed that father of the petitioner Nos. 1, 3 and 4, was a subscriber to the memorandum of articles of association of the Company and one of the first directors, but his family members were excluded by the respondents for allotment of the rights shares. This conduct of the respondents is found to be burdensome, harsh and wrongful, as envisaged Shanti Prasad Jain s case (supra) to meet the requirements of section 397 and therefore, there is just and equitable cause for winding up the Company. However, the Company with huge profits and surplus reserves, if it is to be wound up would unfairly prejudice the shareholders of the Company, which is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ievance on this account. The mere plea that the sale of raw-silver and film was not accounted for nine years from 1983 to 1992 and, therefore, siphoned of by the respondents, without any proof of such misappropriation does not merit any consideration, after a lapse of more than a decade. The qualifications of the statutory auditors in relation to non-reconciliation of quantity of raw-films sold and purchased and non-confirmation of balances by the debtors and creditors existed even when the third petitioner was on the board of the Company. Mere suspicion of the petitioners that In the absence of reconciliation of raw-films sold and bought from the customers, there was reason to believe that the Company has made sales and purchases, which were not obviously brought into books of account resulting in siphoning of huge amounts in the absence of any concrete material does not warrant the CLB s interference. The petitioners firm belief that the respondents have not obtained confirmation of balances from debtors, since they have already collected all the amounts from the debtors and siphon of the amounts not being specific, lacks details. The petitioners only apprehend that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or qualifications in the auditors report, as the case may be. This Board in Andhra Pradesh State Civil Supply Corpn. Ltd. s case (supra), declined to invoke the jurisdiction of section 235 on the basis of a mere statement of facts based on the auditors report without any corroborative evidence. Mere technical violations may be dealt with other relevant provisions of the Act as held in Chandrika Prasad Sinha s case (supra). This Board, while exercising the powers under section 235 in Rohinten Mazda s case (supra) came to the conclusion that an order of an investigation cannot be made on mere suspicion or surmises without proper materials to enable the Bench to form an opinion that the affairs of the company are required to be investigated. This Bench is not, therefore, obliged to appoint an inspector for the purposes of the investigation, in exercise of the powers under section 235 of the Act. By virtue of clause (b) of section 237, the CLB may take the initiative for ordering an investigation suo motu or on the application or information supplied by any shareholder or other person. Though, the petitioners have not invoked section 237(b), yet if the CLB is satisfied that the circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion for impleadment of the proposed respondent Nos. 6 and 7 mainly on the ground that there are no allegations in the company petition in regard to the alleged diversion of funds to the proposed respondent No. 6 and the investments in proposed respondent No. 7 by the Company, in support of which Shri T.K. Seshadri, learned Senior Counsel relied upon the decision of the Orissa High Court in N.K. Mohapatra s case (supra). The High Court while considering the maintainability of the application for amendment of the company petition held thus : The power to allow an amendment is undoubtedly wide and may at any stage be appropriately exercised in the interest of justice, the law of limitation notwithstanding. But exercise of such far-reaching discretionary power is governed by judicial considerations, and wider the discretion, greater ought to be the care and circumspection on the part of the court. All amendments will be generally permissible when they are necessary for determination of real controversy in the suit. All the same, substitution of one cause of action or the nature of the claim for another in the original plaint or change of subject-matter of or controversy in the proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ertainment facilities, comprising a multiplex of 4 screens, family entertainment centre and shopping. The project was awarded to your company in October, 2000. The estimated project cost is ₹ 6,100 lakhs and the Industrial Development Bank of India and Andhra Bank have expressed their willingness to provide financial assistance of up to ₹ 3,000 lakhs for financing the project. Your Directors have floated a new company namely Prasad Media Corporation Ltd. for implementing the project. The above statements from the board of directors clearly reveal that the Company successfully participated in the competitive bid for establishing an IMAX Theatre Project floated by the Government of Andhra Pradesh and that the project was awarded to the Company in October, 2000. This is brought out by a copy of the Government order dated 19-10-2000 of Government of Andhra Pradesh awarding the project in favour of the Company, produced belatedly by the petitioners and, therefore, no reliance is being placed for the present on this piece of document. Nevertheless, it is far from doubt that the directors unequivocally made it clear that the Company was successfully awarded the IMAX Theatr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount to an act of mismanagement/diversion of funds or not, before which the proposed respondent No. 6 must be given an opportunity of hearing on these contentious issues. In view of this, the proposed respondent No. 6 must be arrayed as a party to the company petition. The applicability or otherwise of the decisions regarding fiduciary duty of a director dealt in Charles G. Guth and The Grace Company, Inc., of Delaware s case (supra) and Canadian Aero Service Ltd. s case (supra) cited by Shri Datar learned Senior Counsel to the facts of the present company petition, will arise only on hearing the version of Prasad Media Corporation Ltd. The prayer for the impleadment of the respondent No. 7 is declined, in view of the fact that it is a subsidiary of the Company and, therefore, the investments made by the Company in its subsidiary company, whether would amount to diversion of funds could be considered in the absence of the proposed respondent No. 7, but after hearing the Company in this behalf. 9. In view of the foregoing conclusions and in exercise of the powers under section 402, I order as under:- (a)The second respondent would transfer, out of his shareholding in the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X
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