9911796707
TMI Blog2006 (3) TMI 772X X X X Extracts X X X X X X X X Extracts X X X X ..... M/s Ganesh Commercial Co. Ltd. is a public limited company incorporated in 1940 under the Indian Companies Act, 1913. This company is a closely held entity and is more in the nature of quasi-partnership. The company has its registered office at 18A Roopchand Rai Street, kolkata -7. The total authorized share capital of the company is 25 lakhs divided into 20000 equity shares of ₹ 100 each and 5000 preference shares of ₹ 100 each. The total issued and paid up share capital of the company is 11,00,000 divided into 11,000 equity shares of ₹ 100 each. The Board of the company comprised petitioner, his son, R-2 and a family friend Mr. M.L. Bhaia prior to the impugned alternations/additions. The company had set up its manufacturing units for nuts and bolts and rubber goods in a tenanted property belonging to the original promoters and directors of the company at Kolkata and had invested substantial funds in construction of factory sheds/godowns and other development of the said property. In the year 1999 the company suspended its manufacturing activities completely. The only asset of the company apart from their plant and machinery was their tenancy right in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner and his family. This amount had to be deducted from the company's assets before its division. To get more than 31% of his share of assets in the company R-2 denied the said claim of the petitioner by creating fictitious liability of the company vis-a-vis himself. With this intention R-2 indulged in the following acts of oppression and mismanagement: Important Dates Acts of oppression and mismanagement 14.08.2001 R-2 appointed R-3 as an additional director without any notice either to Mr. M.L. Bhaia or to petitioner No. 1 or his son namely, YashovardhanMohta, the other director of the company. No notice for the General Meeting for confirmation of the said appointment was given to any of the shareholders of the company 2001-2003 All the affairs of the company including the signing of the balance sheet for the period 2001 onwards were being done by R-2 and R-3. 6.4.2004 Petitioner received a letter from Mr. P.C. Aggarwala on advice of ofShri G.P. Birla (who mediated family settlement) alongwith a fictitious statement regarding the sale proceeds received from sale of plant and machinery of the respondent company in the year April, 2004 The petitioner discovere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Set aside all the resolutions passed, as mentioned above, in the General Meeting of the company held on 20.8.2004. 4. As regards acts of oppression and mismanagement, counsel for the petitioner argued that respondent No. 2 appointed respondent No. 3 as an additional director on 14.8.2001(before the resignation of Mr. M.N. Bhaia on 13.11.2001) without giving any notice of the said Board Meeting to the petitioner or to his son and without any notice of the General Meeting to the petitioners or to his son and to his wife for the confirmation of the said appointment. The said appointment was illegal. The petitioner came to know of the said act only in April, 2004 on inspection of Registrar of Companies record after receiving a letter dated 6.4.2004 from Mr. P. Agarwala (on advice of one Shri G.P. Birla - who mediated family settlement). This appointment was done with the sole intention of having the necessary quorum to undertake various activities on behalf of the Board at the back of the petitioners. This fact is borne out from the signatures of respondent No. 2 and 3 on all the subsequent annual returns and balance sheets from 2001 onwards. It was pointed out that the respondents h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company sold by respondent No. 2. Reference was made to letter dated 6.4.2004 which had a statement given by R-2 himself showing that out of the total sale proceeds of ₹ 13.82 lakhs cheque amounting of only Rs,.1.81 lakhs was received and the balance ₹ 12 lakhs was received in cash only. The petitioner also referred to the bank statement annexed at pages 171-181 to the petition showing refund of various cheque amounts received from the buyers of the said plant and machinery. It was pointed out that the respondent had reversed substantial amount of the aforesaid sale in the books of the company by refunding part of the amount by various purchases and canceling the original sale bills and thereafter issuing fresh bills only to the sum of ₹ 1.81 lakhs. . It was vehemently argued that the respondents contention that the amounts shown in the bank statement like ₹ 1.08 lakhs: ₹ 2.28 lakhs: and ₹ 1.27 lakhs were advance deposits given by three parties which were subsequently refunded as they did not buy the entire machinery was misconceived. First of all, it was argued, earnest money deposited was not a condition of sale. In any event the explanation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on the following two judgments: 1. Dale and Carrington v. P.K. Pratapan 2. Madhusudhanan and Anr. v. Kerala Kaumudi P. Ltd. It was argued that it is a fit case for winding up but winding up order could have adverse impact on the rights of the petitioner. In case of winding up the petitioners would get less than what they are entitled to because of the fact of illegal reduction in their shareholding, and in the assets of the company; and illegal inflation in the liabilities of the company. 5. The counsel for the respondents argued and furnished written submissions contending therein that for any relief to be granted under Section 397 of the Companies Act, 1956 (the Act) the petitioners (P) have to make out a case that the facts constituting oppression make it just and equitable for the company to be wound up and that to wind up the company would unfairly prejudice the petitioner. Reference was made to a) Section 397(2) of the Act; b) 1965(2) SCR 720 at 733, Placetum © to (h), 734 Placetum (a) to (f); c) 1981(3) SCR 698 at 744, Placetum (a) to (b); d) 105 Company Cases 465 at 476, 477; e) 2001(4) SCC 420 at Para -3, page 421 Placetum (do) to (f) and Para-12 at page-42 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces of this case. Reference was made to: a) 1981(3) SCR 698 at 746, Placetum (a) to (h); b) 105 Company Cases 465 at 485 (last para), at page 486 (first three paragraphs) 8. In any event, it was pointed out that, notices of all Board meetings and General meetings were given to the petitioner No. 1 at their registered address in India as per past practice. In spite of the same, petitioner did not attend Board meetings and evinced total disinterest in the affairs of the company. As such, it cannot be said that there was any suppression of notice from the petition. In fact, by not attending Board meetings, petitioners group of directors are deemed to have vacated their offices as Directors of the company. (Section 283(1)(g) of the Act.) 9. It was further argued that the petitioners have not come with clean hands and have acted prejudicially to the interest of the company and R as will be evident from the following: a. Petitioners have not paid compensation as per Clause 3 of Settlement dated 16.7.2001 (Petition, pages 80-83 at page 81 and reply, Anne-R-6.) b. Petitioners have handed over possession of the factory land referred to in Clause 3 of the Settlement to a third party wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (g) and (h); and page 762, placetum (g) and (h). (ii) Unreported judgment of the Calcutta High Court dated 31st March, 2005 (Re: Ruby General Hospital Ltd.) at page 36) 11. It was pointed out that the petitioners also cannot complain with regard to the further issue and allotment of shares in the Company for the following reasons: a. Petitioners have by their conduct clearly evinced an intention not to make any further investment in the company and is only interested in realizing the value of their investment; b. Petitioners have not taken any steps to fund the Company for its continued existence; c. Inspite of being offered shares, petitioners have refused to subscribe to shares. Letter of offer was sent to Petitioner's registered address as registered with the company. (Sur rejoinder, paragraph 4 page 3) d. Funds were required by the company to meet its running expenses for the purpose of complying with its statutory obligations and carrying out audit; 12. It was argued that No objection can be taken with regard to the accounts of the company as the accounts have been duly audited and there is no charge against the auditors and auditors are not even parties to this proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which is in issue, whereas, family settlement deals with rights of various members of the family in diverse properties of the family including the company. CLB can pass orders under Section 397 and 398 even if circumstances for winding petition not exist. (see20044 CLJ310 (All)(para35-36). In case impugned action is for incorrect share allotment by inter alia ignoring the articles, removal of Directors, appointing new Directors, these instances by themselves are sufficient circumstances to fully justify that a case of winding petition on just and equitable ground made out. (see98 CC 575 (596-9). The said judgment have been affirmed by the High Court in 19944 CLJ474 (490), wherein the High Court also additionally holds that if actions contrary to understanding, just and equitable ground for winding up made out. Also see 19984CLJ25 (paras30,32) -if provision of the Act ignored, then just and equitable ground to wind up made out. That apart, the winding up order would clearly prejudice the petitioner as it would have adverse impact on the rights of the petitioner as they will get less than what they are rightfully entitled to given the fact that their shareholding have been reduce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the real issue in question but also the said allegation completely overlooked the fact that the said amount is exactly the amount mentioned in the company" books of accounts as well which has not been challenged ever or even now. (c) The issue relating to MoA dated 15.10.2003 is sub judice in Civil Court at Bikaner. Also in the said context, kindly see Annexure A-3, i.e. the petitioner's reply. 3. Various instances of inflated expenditure cannot be looked into as the balance sheet showing the said expenditure has been audited. Moreover, auditor has not been made a party. 3. Once the details have been provided, then even if balance sheet has been audited without any adverse comment will not make any difference. (se96 CC 493 (501). Even if mis-appropriation of funds is not shown then also relief granted (see 19984 CLJ252 (para32). The auditors can only-see whether the document showing expenditure are in order, they cannot look into the fact whether the said expenditure incurred were in fact on account of the company or personal expenses. In any event, the bank statement, being an independent undisputed document shows that the auditors had not examined the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On consideration of the facts and circumstances of the case, I find that the Respondents have failed to refute the allegations against them. As regards respondents' reliance on the decision of the Supreme Court in Bagree's case (Hanuman Prasad Bagree Cereals P. Ltd (2001) 2 Comp LJ 392 (SC) to submit that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds, and that such winding up would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, alter observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ). Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was j ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding under Section 397. In a winding up proceeding on just and equitable grounds, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition first, one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on "the facts of a case. Since Section 397/398, proceedings are alternative to a winding up proceedings, it is not that only those in which are considered to be just and equitable in a winding up proceedings to be the grounds in a Section 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be would up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991)72 Comp Gas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd (44 CC 390) the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "... the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e principle while holding: All ER p.316 E-E. The basis of both cases is, as I understand, that Directors are not entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. The conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was clone with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no such justification has been referred to in the oral submissions. Instead, their new defence was that the accounts were audited and, therefore, cannot be challenged. I find no merit in this argument. The bank statement at pages 171 to 181 of the petition showed refund of various cheques received from the proposed buyers of plant and machinery. Earnest money shown to have been received by way of cheque and the balance amounting to ₹ 12 lakhs was received in cash (as per respondents' own statement--letter dated 6.4.2004). It is unconvincing. R-2, manipulated this by reversing substantial amount of earnest money by refunding part of the amount of various purchasers and cancelling the original sale bills and thereafter issuing fresh bills only to the sum of ₹ 1.81 lakhs. No justification has been provided for this. And now it is argued that the accounts are audited and hence, unassailable. There is no explanation for other inflated expenses mentioned above. In view of the foregoing, the factum of siphoning off of funds stands proved. 19. Further, issue of additional shares in violation of the proper and legal procedure prescribed was already an act of oppression on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal gains and with a view to gain advantage against the other shareholders of a closely held company was neither in compliance with the legal requirements nor ensured the fair play and probity in corporate management, resulting in the enhancement of the shareholding of the second respondent, which would constitute an act of oppression, as held in Praful M Patel v. Wonderweld Electrodes P. Ltd (2002) 6 Comp LJ 423, Akbarali A Kalvert v. Konkan Chemicals P. Ltd. (1994) 15 CLA 170(CLB (2002) 110 Comp. Cases 31 and M.K. Manilas v. Asal Malabar Beedi Depot P. Ltd. (2002) 48 CLA 10 (CLB) The member who holds the majority of shares in the company is entitled by virtue of his majority to control, manage and run the affairs of the company. This is a benefit of advantage which the member enjoys and is entitled to enjoy in accordance with the provisions of company and in the matter of administration of the affairs of the company by electing his own member to the Board of Directors of the company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares, appointing directors and removing the petitioners as directors without following proper proc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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