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TMI Blog2013 (9) TMI 1184X X X X Extracts X X X X X X X X Extracts X X X X ..... s directors of the R3-company and to undo the effect in filing DIN-3 by them. It is further submitted that the petitioners-non-applicants were to be removed as directors by following due course of law. (b) CA No. 4 of 2013 This is a company application filed on behalf of the respondents praying therein to allow the R2 and R4 to sign the application and affidavit in reply dated 5th July, 2013 filed on the same day either by themselves or through R1 as their authorised representative and R1 be allowed to again sign the affidavit in reply dated 5th July, 2013 on behalf of R3-company and also be allowed to affix the seal/stamp of the R3-company. 3. Insofar as the application being CA No.154 of 2013 is concerned it shall be dealt with hereinafter. However, the Application being CA No. 204 of 2013 is allowed as prayed. 4. In order to appreciate the controversies involved in the petition it seems useful to refer to few facts as set out are here as under : 4.1 The petitioner No. 2 is wife of petitioner No. 1. The respondent No. 2 is real brother of the petitioner No.1. It appears that both the brothers were running a partnership business and were engaged in the manufacturing of electr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rch of the website of Ministry of Corporate Affairs, wherefrom he came to know that in none of the annual returns for the financial years 2005-06 ; 2006-07 ; 2007-08 ; 2008-09 ; 2009-10 ; and 2010-11, the petitioners were shown as directors and shareholders. It is further stated that without any prior intimation, notice, Board meeting and consent of the petitioners, the respondent-group also increased the share capital of the respondent No.3-company. It is further averred that the petitioners relied and trusted upon the respondent-group being their family members. 4.7 It is alleged that all the acts committed by the respondent-group are in clear contravention of the articles of association and the provisions contained in the Act and are prejudicial to the interest of the petitioners and, therefore, the petitioners have approached this Bench seeking redressal of their grievances. 5. On behalf of the respondents, reply has been filed. In their reply they have taken a preliminary objection thereby challenging the maintainability of the petition, inter alia, on the ground that the petitioners were not shareholders of the R3-company on the date of filing of the petition and, therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be dismissed being not maintainable. Elaborating the said objection, the learned counsel appearing for the respondents invited my attention to the document filed as Ext. 9, i.e., memorandum of understanding ('MoU') and Exts.10 and 11 the letters of the petitioners, to show that the petitioners had transferred their shares on 17th August, 2004 after incorporation of R3-company and, therefore, they were not shareholders on the date of presentation of the petition. Hence, the petition is not maintainable. 11. Refuting the contentions raised by the learned counsel for the respondents, it was submitted by the learned counsel for the petitioners that the petitioners never transferred their shareholdings as contended by the respondents. According to the petitioners, admittedly, the petitioner No. 1 was holding 4,400 shares, whereas, the petitioner No. 2 was holding 5,100 shares and they never transferred their shareholding in favour of the R3-company. It is further submitted that their signatures were obtained on certain blank papers by the R1 in connection with the business dealings and by misusing the blank papers duly signed by the petitioners, the respondents have fabricat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... time of filing of the petition. Section 399(1) is not a procedural provision. The nature of provisions of section 399(1) is not procedural but it is a part of substantive law and, therefore, the requirements of section 399(1) should be construed as mandatory. The word shall used therein is considered to be imperative in nature and it has to be interpreted as mandatory having regard to the text and context of the statute irrespective of the fact whether any prejudice is caused. In terms of section 399 of the Act the members fulfilling the requirements thereof have the right to allege oppression and mismanagement in the affairs of the company and can file petition in terms of the said sections. In view of the aforesaid unambiguous provisions of the Act, the petitioners are required to satisfy the Company Law Board that the petitioners individually or together hold the requisite percentage of shares in the company. It is the requirement of the law that petition under sections 397 and 398 has to accompany documentary evidence in proof of eligibility and status of petitioners that the voting power held by each of them is as per provisions of section 399 of the Act. The petitioners have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the company in entering their names in the register of member. It is noted that the respondents' contentions regarding this petition being not maintainable under section 399 of the Act are found to be correct as the petitioners had already sold their shareholdings in the year 2002 and had not disclosed this to the Company Law Board. The return for the year 2005 which was downloaded from the website of the Registrar of Companies by respondent No. 7 which showed that petitioner Nos. 1 and 2 did not have any shares even in 2005, the petitioners have failed to file any document to show that they have the requisite qualification on 20th March, 2007, to maintain this petition under section 397/398 in terms of the mandatory provisions of section 399 of the Act. Respondent No. 7 has rightly placed reliance on the case of Syed Musharaff Mehdi v. Frontline Soft Ltd. [2007] 135 Comp. Cas. 280 (CLB), wherein it has been held that the nature of the provisions of section 399(1) is not procedural, but it is a part of substantive law and that a combined reading of sub-sections (1) and (4) would show that the Company Law Board has no option but to reject the application made under section 397 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jratna Metal Industries Ltd. v. K&S Consulting Group (P.) Ltd. [2009] 148 Comp Cas 756 (CLB) and the case of Dinesh Sharma Vardaan Agrotech (P.) Ltd. [2007] 135 Comp Cas 133 the CLB it has held as follows: "15 On issue of maintainability, though the petitioner's shareholding is brought down to 5.92 per cent, after issue of further allotment of shares, otherwise the petitioner was holding 12.11 per cent, of the paid-up capital. In view of the challenge of further allotment of shares, the petition is maintainable in accordance with law and also as held by the Company Law Board in Dinesh Sharma v. Vardaan Agrotech (P.) Ltd. [2007] 135 Comp Cas 133 (CLB - New Delhi). Accordingly, the maintainability issue is answered in favour of the petitioner." (iv) Further, in the case of T.N.K Govindaraju Chetty & Co. v. Kadri Mills (CBE) Ltd. [1996] 96 Comp Cas 871 (CLB), it has been held hereunder : "14.... Allotment of shares to the exclusion of some shareholders has been held, by many High Courts and the Company Law Board itself, as an issue which could be agitated as an act of oppression, in a petition under section 397/398. Therefore, we are of the view that when the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g non-maintainability of the company petition in terms of the requisite qualification under section 399 is not tenable. The petition cannot be thrown out at the threshold." (Emphasis supplied) 14. Taking into consideration, the proposition of law laid down in the abovestated cases, if I examine the case of the petitioners as pleaded in their petition, it would show that the petitioners were undisputedly holding shares constituting 95 per cent of the total shareholding of the R3-company as on 17th August, 2004, i.e., prior to the acts complained of. However, to test the status of the petitioners' shareholding as on the date of filing of the petition, it is necessary to scrutinise the version of both the sides to enable the Board to reach at some conclusion with respect to maintainability of the petition. 15. It is the case of the respondents that on 17th August, 2004 the petitioners transferred their entire shareholding in favour of R1 under a MoU (Ext. 9) and, therefore, they were not holding any share as on the date of filing of the petition and, therefore, the petition is not maintainable in terms of the provisions contained in section 399 of the Act. Per contra, it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 2004-05. It is further submitted that the annual return filed for the year 2004-05 filed as Annexure '5' is admittedly signed by the R1 only, which itself is in contravention of the provisions as contained in sub-section (1) of section 161 of the Act. Further, it does not show that the petitioners had transferred their shares to the R1. 19. Next point argued by the learned counsel is that no transfer can be effected without execution of the transfer deeds in terms of the provisions contained in section 108 of the Act. He adds that the respondents have failed to produce any share transfer forms duly executed by the petitioners. 20. It is, therefore, contended that the claim of the respondents to the effect that the petitioners had voluntarily transferred the shares in terms of the MoU dated 17th August, 2004 to the respondent, is false. To support his contention, he has relied upon the case of Mannalal Khetan v. Kedar Nath Khetan [1977] 47 Comp. Cas. 185 (SC). 20.1 Refuting the contentions of the petitioners, Mr. Chitnis, the learned counsel appearing for the respondents has taken me through the reply filed on behalf of the respondents and submitted that the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... torney in favour of R1. Looking at the contents of the said power of attorney, it can be seen that the main object of the said power of attorney was to give complete control to R1. In this regard, the learned counsel has invited my attention to Ext.6 filed along with the reply. 22. It was further argued that the R1 while serving aboard, purchased latest electronic equipment for manufacturing use in the factory that he had envisaged to start on his return to India. These equipments and machinery were installed in the factory initially in Laxtronics, proprietary firm and thereafter in Laxtronics partnership firm. The worth of these equipments was ₹ 6,40,000 at the time when these were transferred to Laxtronics partnership firm. The worth of these equipments and machinery were shown as unsecured loan in the Laxtronics (partnership firm) in which petitioners were partners and Rl was running the business under power of attorney given by the petitioners. This loan was treated as the net worth of partnership firm, namely, Laxtronics and to this effect a note/declaration duly signed by the petitioners and R1 was given to the concerned financial institution seeking their financial as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mited purpose they were shown as directors before the Registration authority at the time of execution of deed of assignment. 27. Based on the above submissions, the learned counsel argued that in fact the petitioners were not shareholders at the time of filing of the petition and, therefore, the petition is liable to be dismissed and secondly their case that the MoU at Ext.9 and the other documents at Exts. 10 to 12 are fabricated documents, is nothing but totally false. There were within the knowledge of all the documents. 28. Insofar as the issue relating to non-payment of consideration in respect of the impugned transfer of shares is concerned, it was submitted by the learned counsel that section 25 of the Indian Contract Act does not contemplate that for every transfer of the property, consideration in terms of money is necessary. Further, according to the learned counsel appearing for the respondents, the MoU was executed to record the terms of a family arrangement and where there is family settlement, such document is required to be liberally interpreted. Placing reliance upon the decisions of the hon'ble Supreme Court reported in (1) S. Shanmugham Pillai v. K Shanmugha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a single isolated act or action can never amount to an oppression as has been held in the case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 3 SCC 333. 32. I have considered the rival submissions and perused the record. First of all, I need to examine the genuineness and authenticity of impugned MoU filed as Ext. 9 and the Exts. 11 and 12 by which the petitioners have allegedly transferred their shares. I would like to reproduce here relevant extracts of the said documents, which are as follows : 'MEMORANDUM OF UNDERSTANDING This memorandum of understanding is made between (1) Mrs. Vidya Bhola Khalkar and (2) Mr. Bhola Waman Khalkar, Party of the First Part and Mr. Laxman Waman Khalkar, the Party of the Second Part. 1. Whereas parties of the first part to this memorandum of understanding were the partners in partnership firm named as "Laxtronics" with its registered office at Plot No. K-16. MIDC, Ambad, Nashik - 422 010. 2. The said partnership is converted into the private limited company named as Laxtronics Instruments and controls private limited from 1st March, 2004. 3. The parties of the first part have 5,100 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t their signature below in front of the witnesses. Date : Vidya B. Khalkar 27, Sanmitra Vasahat, Indira Nagar Nasik The Managing Director LAXTRONICS Instruments and Controls Private Limited, K-16, M.I.D.C., Ambad, Nasik-422010. Subject : Transfer of equity share, Sir, I am transferring 5100 equity shares without any consideration from my name to Mr. Laxman Waman Khalkar Residence of SSA - 25, Shrawan Ash win Sector, CIDCO, Nashik - 422009. Sd- 17/08/04 (V. B. Khalkar) Tel. :+2535605121 Fax.: +912535601241 E-mail: [email protected] Manufacturer of: Automatic Production/Q.A. Testing Equipments, Power Supplies, Inverters. Converters, Temperature & Humidity Data Logger, Calibrators, LCR Bridges, Custom Built Equipments. Laxtronics K-16,M.I.D.C. AMBAD, NASHIK-422010; INDIA Visit us at :http://members.tripod.com.laxtron ………………………………………………………………………………………………………&h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 12. As indicated hereinabove, the petitioners admit their signature on all the above documents. Admittedly the petitioner No.1 is a permanent professor in College of Commerce Nashik. Similarly, the petitioner No.2 is lecturer in J D Sawant College Nashik. Both are post-graduates in commerce. Being educated person in commerce faculty, they must be aware of all the consequences of signing of the blank documents. Moreover, the MoU (Ext. 9) is a duly notarised document. It is witnessed by two persons. The alleged discrepancies pointed out by the petitioners in the MoU are vague and baseless. This MoU was acted upon which is evident from further corroborative evidence filed and relief upon by the respondents. The same shall be discussed hereinafter. 35. It is surprising to note that since 2004 onwards, why the petitioners did not enquire about the quarterly Board meeting and AGM of the R3-company in past 7 years until 2011 and they never raised any query about it. They are supposed to be aware being post-graduates in commerce that the absence in 3 consecutive Board meetings by a director leads to cessation of a director in the company. They also failed to explain by any cogent and conv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er hold that they themselves signed and executed the documents Exts.9 to 12. I am, therefore, not inclined to accept the case of the petitioners that the signatures were obtained on the blank papers which were subsequently cooked-up by the R1 with purpose to gain the entire control of the business. I, therefore, reject the case of the petitioners that the documents by which they had transferred their shareholding in favour of the Rl and submitted their resignations in terms of the MoU (Ext. 9) are concocted and fabricated documents. 37. Further, the respondents had filed Form 32 immediately thereafter in the year 2004 which confirms the fact that the petitioners had in fact resigned from the Board of directors after making transfer of their shareholding in favour of R1. 38. Now, I proceed to examine the other pleas taken by the petitioners questioning the transfer of shares of the petitioners in favour of the R1. Insofar as the challenge with regard to transfer of share by the petitioners in favour of R1 on the ground that since no consideration has been made and, therefore, the transfer is invalid in my opinion, is also not tenable. In my opinion, the Rl has already explained al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho are recognised in law as having a right of succession or having a claim to a share in the property in dispute... The consideration for such a settlement, if one may put it that way, is the expectation that such a settlement will result in establishing or ensuring amity and goodwill amongst the persons bearing relationship with one another. That consideration having passed by each of the disputants, the settlement consisting of recognition of the right asserted by each other cannot be permitted to be impeached thereafter. The same view was again reiterated in Maturi Pullaiah v. Maturi Narasimham AIR 1966 SC 1836.' 40. The aforesaid view was confirmed by the hon'ble Supreme Court in its decision in the case of Ranganayakamma v. K S Prakash [2008] 15 SCC 673. 41. Now, I would like to scrutinise the facts of the case in hand in the light of the abovementioned decisions. Undisputedly, the petitioner No.1 and the R1 are the real brothers. Petitioner No.2 is sister in law of R1. They are closely related and had very cordial relations with each other. As is evident from the discussions made hereinabove, the R1 has successfully proved that it was his entire contribution in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares. I also do not find much force in this contention that the compliances of section 108 of the Act is not mandatory as held in the case of ICICI Venture Funds Management Co. Ltd. (supra); Multimedia Frontiers Ltd. v. Software Frontiers Ltd. [2007] 75 SCL 511 (CLB - Chennai). 44. In my opinion the facts of both the cases are different from the facts of the case in hand. In the said cases, the deeds of transfer were executed by the transferors and only some technical defects were found, the instrument of transfer was not duly stamped. Therefore, it was held that merely on the ground, if an instrument of transfer is not duly stamped, the transfer of share cannot be held as invalid transaction between the parties. In the present case admittedly no transfer deeds have been produced by the respondents to show that they were executed by the petitioners for transfer of their shares. However, it is to be kept in mind that the petitioners have not filed this petition under section 111 of the Act seeking rectification in the register of members of the R3-company nor they have produced any original share certificate in physical form. I, therefore, find substance in the submission of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rms of the provisions contained in section 399 of the Act. 47. Though, I have held that the petition is not maintainable, nevertheless, I deem it appropriate, just and proper to deal with the other points raised and argued before me by the parties counsel. I, therefore, move forwarded accordingly. 48. In view of the above findings the alleged acts of oppression, i.e., allotment of shares without notice to the petitioners and illegal induction as R2 and R4 on the Board of directors becomes meaningless. In my opinion, the petitioners are not entitled to challenge the said acts as acts of oppression as they had themselves transferred the shareholdings and exited out from the R3-company and also resigned in the year 2004 itself as directors. Therefore, the aforesaid pleas taken by the petitioners are hereby rejected. The decisions referred to at bar in relation to the said issues are, therefore, not being discussed. 49. The learned counsel appearing for the respondents has submitted that the petitioners were aware of the fact that they have already transferred their shareholding in favour of R3-company. Inviting my attention to Form 32 filed with RoC and annual returns filed in subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts must fail. There is no record to show that the notices have been served upon the petitioner. In the circumstances, there is no necessity to deal with the cases cited by both the counsel in regard to the validity of the service of notice by certificates of posting. In the absence of proof of service of notice upon the petitioner for the Board meetings, the proceeding of the Board are not valid as has been held in Parmeshwari Prasad Gupta's case (supra). Therefore, the plea that the petitioner ceased to be a director by virtue of section 283(1)(g) must fail. (ii) Mohinder Singh v. Hoshiarpur Express Transport Co. Ltd. [2008] 86 SCL 155 (CLB - New Delhi). "The respondents' contention that the alleged acts of oppression and mismanagement took place in 1996, 1998 whereas the petition has been filed in the year 2001 and hence there is delay in filing the petition is also not tenable in view of the fact that it is a settled position that the Limitation Act does not apply to this quasi-judicial functioning of this court which exercises equitable jurisdiction under section 10E(5) of the Act. However, laches are applicable. The Board has always taken the view that if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The contention of the petitioners that the delay was on account of their attempts to settle the disputes amicably in the domestic forum. It is a not uncommon that in family companies, judicial intervention is sought only when attempts to settle the disputes amicably, fail. Further, proceedings under section 397/398 are equitable in nature and, therefore, strict technicalities cannot be applied more so when limitation act is not applicable to proceedings under section 397/398 before this Board. Therefore, I do not consider that this petition is barred by limitation. In number of cases, this Board has held that insofar as allotment of shares is concerned, even though it is single act, since it has continuous effect, the same could be considered to be an act of oppression within the meaning of section 397 of the Act." (ii) Amrit Lal Seth v. Seth Hotels (P.) Ltd. [2009] 95 SCL 161 (CLB - New Delhi) "It is correct that this Board has always taken the view, as submitted by learned counsel for the petitioner, that allotments due to which the percentage holding had come down to below 10 per cent could be examined at the threshold. While doing so, this Board has always kept ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... crease of the capital and further issuance thereof. The petitioner had several occasions to register his complaint or grievance about this but it was not done as is evident from the correspondence adduced by the respondents for that period. This issue has been raised for the first time by way of filing this petition under sections 397 and 398 of the Act in February 2005. No justification, whatsoever, has been given by the petitioner for the delay in filing the petition. It is true that the provisions of the Limitation Act, 1963 do not apply to the proceedings of this quasi-judicial authority which, as per the provisions of section 10E(5) of the Act, 1956 "shall in the exercise of its powers and the discharge of its functions under the Act or any other law be guided by the principles of natural justice and shall act in its discretion." Of course, latches do apply. The petitioner is guilty of latches in this case. Thus, I find that the petition is not maintainable even on the basis of the preliminary objections raised in this case. 53. On the basis of the discussions made hereinabove, I have come to the conclusion that the petitioners have failed to prove their case either ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and the petition is not bona fide and, therefore, the petition is liable to be dismissed on this ground. CA No. 154 of 2013 56. Now, I propose to deal with the CA No. 154 of 2013 filed on behalf of the respondents praying therein to pass an order thereby issuing an appropriate direction to R3 company to remove the names of the petitioners-Non-applicants as directors of the R3-company and to undo the effect in filing DIN-3 by them. It is further submitted that the petitioners-Non-applicants were to be removed as directors by following due course of law. 57. It is contended on behalf of the respondents that during the pendency of the instant petition, upon making enquiries with the RoC they came to know that the petitioners/Non-applicants were purportedly shown as directors of the R3-company. According to the learned counsel they had already left the company in 2004 and Form 32 was duly submitted in the office of the RoC immediately after their resignation as directors. According to him, from bare perusal of the forms submitted by the petitioners/Non-applicants with the RoC it can be observed as under : (a) Both respondent Nos.1 and 2 mention themselves as 'director' o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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