9911796707
TMI Blog2006 (11) TMI 684X X X X Extracts X X X X X X X X Extracts X X X X ..... kin on the board of directors of the Company; (f) misuse of the office equipments for the benefit of his personal business; (g) illegal writing off the assets of the Company by debiting the profit and loss account; (h) illegal forfeiture and re-issue of shares for personal gains; (i) non-maintenance of any minutes book of the meeting of the board of directors; and (j) non-delivery of the share certificates of the majority shareholders of the Company, have invoked in the present petition, the provisions of Section 397 and 398 of the Companies Act, 1956 ( the Act ) seeking the following reliefs: (i) to supersede the board of directors and appoint an administrator to take charge of the affairs of the Company; (ii) to restrain the respondents from entering into or handing over possession of the Company's landed property to third parties; (iii) to set aside the shares acquired by the second respondent and his relatives during the period between September 2001 and September 2002; (iv) to restrain the second respondent and his relatives from conducting the affairs of the Company (v) to direct the second respondent to reimburse the personal expenditure incurred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7; 3079/- per sq.yard in the year 1999 and the petitioners by their letter dated 16.09.2002, offered to buy the land at ₹ 3200/- per sq.yard thereby causing losses to the Company. The second respondent, in fact had sold the property at the rate of ₹ 5800/- per sq.yard, but accounted only an amount of ₹ 2200/- per sq.yard in the books of account of the Company. The second respondent herein has been acquiring shares including forfeited shares in the Company from the unaccounted money received on account of sale of the land. During the period between 23.06.1995 and 26.09.2002, the second respondent's shareholding has been increased from five shares to sixty-one shares. The respondents claim that the Company is in possession of 5216 sq.yards as against 6,222.75 sq.yards, but failed to account for the shortage of land to the extent of 1,006 sq.yards. * The Company forfeited 18 partly paid shares of ₹ 70,000/- each during the year 1997-98. The second respondent paid the balance amount of ₹ 30,000/- for each of the forfeited shares and got those shares re-issued to himself, his friends and relatives, without making any offer to other members of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d meetings of the Company. Though Form 32 notifying the vacation of office of director by B. Jagan Mohan Rao, with effect from 10.03.2001 has been filed, it does not contain any date of filing of such return. At the same time, the fourth respondent has not been disqualified, inspite of his absence continuously for more than three consecutive board meetings of the Company. Similarly, GSLV Prasad and MA Rama Rao appointed as directors in October, 2000 never attended any of the board meetings but they continued to be directors till their resignation. The second respondent's daughter was reportedly appointed as director at the board meeting held on 02.02.2002, wherein there were only two directors out of whom the second respondent was an interested director and the meeting was held without a valid quorum. Therefore, the appointment of the second respondent's daughter as director is not valid. * The second respondent as Chairman and Managing Director never maintained any minutes book of the board of directors from the beginning, but fabricated the minutes after filing the company petition. The second respondent, in response to a communication dated 23.09.2002 of the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s books of account, thereby causing dimunition in the value of the Company's shares. The rents, salaries, electricity and telephone charges, office expenses, legal fees, repair and maintenance etc., incurred during the management of the respondents, as borne out by the balance sheet for the relevant years exorbitantly increased, despite the fact that the Company has not been carrying on any of the activities which resulted in an accumulated loss of ₹ 62 lakhs as at the end of March 2002. The second respondent further misused the Company's funds in the year 2001-2002 by purchasing inter-alia, computer, computer peripherals, NSE software, furniture and fitting for ₹ 62 lakhs and other office equipments for the use of FSI. Thus, funds and infrastructure facilities of the Company were grossly misused by the second respondent's wife. * The Company's landed property is being used by M/s Kakatiya Public School for parking their vehicles and also as a playground for a consideration of ₹ 20,000/- per month, as borne out by the photographs and third-party affidavits filed in this behalf and the amounts received for such use in the last five years to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order under the just and equitable clause. This Board as held in Sanjeev Joy and Ors. v. Pererira Roche Private Limited and Ors. (2002) CLC 1598 has wide powers to direct the petitioners to go out of the Company by selling their holdings to the respondents vice-versa when the parties are not getting on well in pursuing the objects of the company. It is held in Harikumar Rajah v. Sovereign Dairy Industries Limited (1998) 4 CLJ 252 that the Court having vast powers under Sections 397 and 398 is vested with the power to make such order as it thinks lit to bring to an end the matters complained of. Section 402 of the Act specifies some of the powers which can be exercised by the Court on application under Section 397 and 398 of the Act. The Supreme Court in Needle Industries (India) Limited and Ors. v. Needle Industries Newey (India) Holding Limited and Ors. held that the Court is empowered to grant relief, to do substantial justice between the parties even when no case of oppression is made out by the aggrieved shareholders. It has been held in Yashovardhan Suboo v. Groz-Bedert Saboo Limited and Ors. (1995) Vol. 83 CC 371 to show that even if a case of oppression is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d of directors was authorised to sell a part or whole of the land owned by the Company. The Company had purchased a total extent of 6000 sq.yards of the landed property in the court auction proceedings, as disclosed by the agreement dated 25.10.1997 executed between the Company and M/s Merlin (India) Limited and not 6222 sq.yards as claimed by the petitioners. An extent of 350 sq.yards is in illegal occupation of a mechanic, affecting the saleability of the property. A number of matters relating to his eviction apart from a criminal complaint with local police are pending before the courts, The Company has received an amount of ₹ 8.24 lakhs towards compensation for loss of the Company's property to the extent of 400 sq.yards for laying a municipal road. The Company sold in the year 570 sq.yards to various persons in the year 2002. The Company has lost an extent of 175 sq.yards on account of widening of the road. As a result, the Company is left with the remaining extent of 4470 sq.yards of the landed property, a portion of which has four roads, while the rest of the property has only one approach road of 24 ft. wide. There are huge hills occupied by slum dwellers on the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s dated 07.09.2002 and 16.09.2002 expressed their willingness to purchase the property at the rate of ₹ 3000/- and ₹ 3200/- per sq.yard respectively, while the valuation certificate produced by them puts the valuation at ₹ 7000/- per sq.yard. This amply establishes the conduct of the petitioners 1 2. These letters are proximate to the date of the company petition and therefore, no reliance can be placed on such motivated letters. * At the board meeting held on 02.01.1999 the board of directors unanimously resolved to forfeit 18 partly paid shares and further authorised the Chairman to allot the shares to any person or persons who may be willing to pay the call moneys without interest to meet the urgent needs of the Company. By virtue of Article 33 any forfeited share shall be deemed to be the property of the Company and the board of directors may sell, re-allot or otherwise dispose off the same in such manner as they think fit. The report of directors to the fourth annual general meeting dated 31.07.1999 clearly states that during the course of the year ended 31.03.1999 all the eighteen partly paid shares were forfeited after giving due notice to the concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-issued to the second respondent and his wife jointly. The said shares were bought in the market alongwith some other shares in the market. Therefore, the petitioners are estopped from challenging the forfeiture and re-issue of shares. The petitioners have neither sought any relief in respect of the forfeited shares. The Company did not suffer any loss on account of forfeiture of the shares. The person in whose favour, the shares were re-issued have not been impleaded as parties to the company petition. There is no restriction on any of the members of the Company for purchasing the shares from one another under the Memorandum and Articles of the Company. In a public company, shares are freely transferable and any one can acquire shares in the open market. The Calcutta High Court held in Mohta Brothers Private Limited v. Calcutta Landing and Shipping Company Limited (1970) Vol.40 CC 119 that there is nothing illegal, not even improper, in a person acquiring the shares of a joint stock company in the market unless such transactions in shares are proved to have been effected by unfair manipulation of the share prices. Mr. K. Vishnuvardhan bought four shares and got them transferre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... videnced from the attendance sheet, which is on record. The notice dated 06.10.2000 of the board meeting held on 13.10.2000 circulated to directors does not contain the name of the petitioner No. 21, yet he attended the board meeting held on 13.10.2000. The petitioner No. 21 last attended the board meeting of the Company held on 09.03.2001 and failed to attend the subsequent three board meetings, inspite of service of the notices of the board meetings. His vacation of office has been recorded at the board meeting held on 02.02.2002. At the board meeting held on 09.03.2001, wherein the petitioner No. 21 was present, the vacation of office of director by B. Jaganmohan Rao by virtue of Section 283(1)(g) was recorded. This has not been objected to by the petitioner No. 21. The vacation of the office of director by Shri G. Suresh Babu was recorded at the board meeting held on 17.03.1999, wherein the petitioner No. 21 participated and therefore, aware of the vacation of office by G. Suresh Babu. Similarly, K.V. Siva Sudhakar, N. Srinivasa Rao and Jagan Mohan Reddy neither attended three consecutive board meetings nor took leave of absence of the board and thereby the disqualification und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Company, whenever he attended the board meetings and the fourth petitioner presided over the board meetings during the year 1997 and the minutes were recorded under his Chairmanship in the same book which were maintained since inception of the Company. The statement of accounts for the year ended 31.03.1999 was adopted at the board meeting held on 31.07.1999. All administrative expenses of the Company furnished in schedule 3 forming part of the balance sheet were approved by the board of directors, to which the petitioner No. 21 was a party, as borne out by the minutes of the meeting. All administrative expenses incurred by the Company, which are disclosed in annexure-K. forming part of the balance sheet for the year ended 31.03.1988 were approved at the board meeting held on 01.09.1998. Article 110 provides that two directors or one-third of the total strength of directors whichever is higher shall be the quorum. As on 02.02.2002 the total strength of the board consisted of only five directors and therefore, the board meeting held on 02.02.2002 with two directors present was perfectly in order. The markings like P2, P4 etc. were made by the respondents on the minutes pages of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure pertaining to the year 1996-97 in order to compare unfavourably with the corresponding figures of the year 2001-2002. The petitioners have ignored the steep upward revision of the electricity and postal charges during 2001-02. There would bound to be increase in salary over a period of five years. The steps taken by the respondents to reduce the expenditure under several heads have been elaborated at the seventh annual general meeting. The Company, with a view to implement its main objects, had taken the membership of Bhuvaneswar Stock Exchange Limited and Interconnected Stock Exchange of India Limited and registered itself as a stock broker. Therefore, the Company was forced to purchase computer and other office equipments. The investments in Bhubaneswar Stock Exchange and Interconnected Stock Exchange India Limited are bonafide investments made in the year 1996 and are past and concluded transactions. Though the Company secured membership in Bhubaneswar Stock Exchange Limited and Interconnected Stock Exchange of India Limited, yet, due to the fast changing dynamics of the Regional Stock Exchange, the business through Bhubaneswar Stock Exchange suffered and therefore, the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... remedy to winding up in case of oppression or mismanagement, where it was felt, though a case has been made out on the ground of just and equitable clause to wind up a company, it was not in the interest of the shareholders that the company should be wound up and that it would be better if the Company was allowed to continue under such directions as the Court may consider proper to give. Section 153C of the Indian Companies Act, 1913 came to be substituted in the present form of Sections 397, 398, 402, 403, 404, 405 and 407 of the Indian Companies Act, 1956. If the acts complained of are not established, the CLB can not pass any order as it thinks fit, either under Section 397 or Section 398 to bring the matters complained of by the aggrieved shareholders. Section 402 is an illustrative and self contained but not substantive provision. The CLB may in exercise of the powers under Section 402(g) may provide for any other matter on just and equitable grounds only when the requirements of Section 397/398 are duly satisfied by the aggrieved shareholders. * Section 397(2) provides that an order could be made, to bring to an end the matters complained of. on an application made under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tutory provisions. The Calcutta High Court in Maharani Lalita Rajya Lakshmi v. Indian Motor Co. held that under Section 397, it is imperative that the Court's opinion on both the points enumerated in Clauses (a) and (b) of Sub-section (2) must be formed in the affirmative before any order could be made under that section. If the Court is not satisfied on any of these points no further questions can arise under Section 397. If the Court is satisfied, it may make such order as it thinks fit with a view to bringing to an end the matters complained of. The Supreme Court, however held in Needle Industries (India) v. Needle Industries Newey (India) Holding Limited (1982) Vol.I CC 1 that even where a petition under Section 397 of the Act is found not maintainable and oppression is not proved, the Court is not powerless to do substantial justice between the parties and place them as nearly as it may, in the same position in which they would have been, had the act complained of not taken place. The Court, the Supreme Court meant in that decision the Supreme Court and accordingly the Supreme Court in exercise of its constitutional power under articles 140, 141 and 142 of the Constitu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any are being conducted in a manner prejudicial to public interest or to the interests of the Company. There has been no material change taken place, in the management or control of the Company as contemplated in Section 398(1)(b). These must be independently pleaded and proved. The Supreme Court in Sangramsinh P. Guekwad v. Shantudevi P. Gaikwad (2005) Vol. 123 CC 566, held that unless a case is made out in the petition itself under Section 397/398, no relief can be granted by the Court and the defects contained therein cannot be curved nor the lacuna filled up by other evidence oral or documentary. * The petitioners now have become majority shareholders, upon which oppression ceased to exist. Nevertheless, the petitioners are seeking the reliefs, with a view to gain advantage in the pending civil suits, which cannot be permitted by the Bench. The present proceedings are summary proceedings, whereas the civil suits which are pending in relation to the affairs of the Company are comprehensive proceedings. The petitioners must work out their remedies in the civil suits. There are 216 members and therefore, it is not feasible to divide the landed property among these shareholder ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the property. There is an encroachment on one side of the property to an extent of 350 sq.yards in the form of mechanic shed, in respect of which civil and criminal proceedings are pending before the competent Courts. At the annual general meeting held on 30.09.1998, the board of directors was authorised to sell a part or full of the land owned or to be owned by the Company . At the board meeting held on 29.09.1999, the board of directors including the petitioner No. 21 authorised the second respondent and the director finance to enter into an agreement with M/s. Vijayawada Share Brokers Limited (VSBL) for sale of the 4/15th undivided share of the landed property for a consideration of ₹ 51 lakhs, which, however, came to be terminated on account of non-fulfilment of the terms of the agreement by VSBL, as borne out by the minutes of the board meeting dated 23.12.2000. The petitioner No. 21 is a party to the resolution cancelling the sale transaction with VSBL. It is observed from the minutes that VSBL could not arrange further payments in terms of the agreement and the Company could not resolve certain legal issues, forcing the Company to return the advance amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the valuation certificate produced by the petitioners at the rate of ₹ 7000/- per sq.yard cannot be realistic. The market value and saleable value of any property cannot be one and the same. It shall be borne in mind that the petitioners 1 2 in their letters dated 07.09.2002 and 16.09.2002 offered to purchase the landed property at the rate of ₹ 3000/- and ₹ 3200/- per sq.yard respectively which would indicate, in my opinion, that the market rate cannot be ₹ 7000/- per sq.yard as reported in the valuation certificate. In the circumstances, I am not inclined to interfere with the management decision of the board of directors of the Company for having sold 570 sq.yards of the landed property at ₹ 2200/- per sq.yard. Accordingly the purchasers shall derive valid title to the property acquired from the Company. According to the petitioners the second respondent failed to account for the shortage of the landed property owned by the Company, Nevertheless there is no documentary evidence to show the extent of landed property acquired for purpose of the Company. At the same time, the agreement dated 25.10.1997 executed between the Company and M/s Merfin (I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o any person or persons who may be willing to pay the call moneys due without interest. At this juncture, it shall be borne in mind that none of these persons whose shares have been forfeited has ever complained of any irregularity regarding forfeiture of partly paid shares. No affidavit has either been filed by any of such shareholders, ventilating any grievance in this behalf. The report of directors dated 31.07.1999 to the fourth annual general meeting categorically states that during the course of the year all the eighteen partly paid shares were forfeited after giving due notice to the concerned members. The report of the directors was discussed and adopted at the board meeting held on 31.07.1999 and the petitioner No. 21 was a party to such discussion and adoption of the report of the directors to the fourth annual general meeting of the Company. The board of directors at the board meeting held on 24.12.1999 including the petitioner No. 21 authorised the Chairman and director finance to raise the resources in whatever best possible manner including re-issue of the forfeited shares of the Company to any person or persons willing to take at such terms as are permissible. The ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent or his family members in the Company cannot be questioned. The minutes of the board meeting dated 02.02.2002 reveal that the petitioner No. 21 was continuously absent for the board meeting held on 08.06.2001, 29.08.2001 and 22.12.2001 without obtaining any leave of absence of the board. It is observed from copies of the notice dated 01.06.2001 and 20.08.2001 of the board meetings held on 08.06.2001 and 29.08.2001 that notices have been reportedly sent by post to the petitioner No. 21. There is no material to show that any notice was served on the petitioner No. 21 for the board meetings held on 08.06.2001 and 29.08.2001. Mere production of copies of the notices with endorsement that notices have been sent by post will not establish service of any notice. The notice dated 12.12.2001 of the board meeting held on 22.12.2001 is silent as to the mode of despatch of notice to the petitioner No. 21. It is. therefore, far from doubt that the Company failed to establish proper and due service of notice of the board meetings held on 08.06.2001. 29.08.2001 and 22.12.2001, which is an essential requirement to invoke the provisions of Section 283( 1 )(g). It is on record that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 29.09.2002 are signed by the second respondent as Chairman of the meetings, the minutes dated 02.01.1998 are signed by the fourth petitioner. Similarly, the original minutes of the board meetings have been produced since July 1995. There are as many as 67 minutes of the board meetings held between 05.07.1995 and 14.10.2003. All those minutes save the minutes of 10 board meetings held between 23.12.1996 and 09.01.1998 which are signed by the fourth petitioner, have been signed by the second respondent. All these minutes of the board meetings and general meetings are not numbered. The Chairman has initialled each page and signed at the last page of the minutes of the board and general meetings, however, without putting the date. This practice has been uniformly adopted by the Company since its inception under the Chairmanship of the second respondent as well as the fourth petitioner. However, the minutes of the board meetings dated 31.07.1999 and 11.08.2000 are left unsigned by the fourth petitioner. In view of the present peculiar circumstances, the minutes produced by the Company though do not confirm to the requirements of Section 193 cannot be invalidated. Otherwise every decis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of future rentals or any action taken by the Company for non-payment of the rent by the school for parking its vehicles. In regard to the charges regarding fictitious losses and writing off the Company's assets, it may be observed that the board of directors including the petitioner No. 21 at the meeting held on 23.12.2000 deliberated the proposal for sale of the computer systems available with the Company, the relevant portion of which runs thus: The Chairman then informs that a proposal for purchasing of the Computer System available in the Company was received from the management of VSBWA. This Computer system was supplied by CMC Ltd., as part of the overall Screen Based Trading project implemented by the Company but due to completely changed circumstances the same is idle now. After an exhaustive bargaining the consideration was agreed to be ₹ 48 Lac for the system and the associated software. In the discussion that followed Directors unanimously approved the bargain as being in the interest of the Company and ratify the Memorandum of understanding reached with VSBWA.... The board of directors unanimously took a conscious decision to sell the computer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 21 was on the board of the Company till 02.02.2002 and hence he cannot plead ignorance of the fictitious expenses, if any, booked in the books of account of the Company during the relevant point of time. The fourth petitioner was Chairman of the second annual general meeting held on 24.01.1998, when the balance sheet of the Company as on 31.08.1997 and profit and loss statement for the period from 01.10.1996 to 31.09.1997 were adopted and approved by the members. It is observed that the Company had incurred an amount of ₹ 4.47 lakhs towards administrative expenses, though the Company had not commenced its main service activities during the relevant, as borne out by the Auditor's report dated 17.12.1997. The auditor's reports dated 05.11.1996, 17.12.1997, 01.09.1998, 02.08.1999, 28.08.2000, 30.08.2001 and 28.08.2002 forming part of the annual report for the years ended between 31.08.1996 and 31.03.2002 clearly state that no personal expenses have been charged to revenue account except those payable under contractual obligations and as per prevailing trade practices. The reports of the auditor are not under challenge by the petitioners. Against this background, the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the CLB cannot usurp the power of the Supreme Court to grant any relief in favour of the petitioners, since no case has been made out under Sections 397/398. The very same issue came before this Board in Delstur Commercial Financial Limited v. V. Sarvottum Vinijaya Limited (2001) Vol.3 CLJ 442, wherein after exhaustively considering the contentious issue, the following conclusions have been reached: The appeals by special 'leave considered by the apex court in Needle Industries (India) Ltd.'s case (1982) 1 Comp LJ I (SC), supra, arose out of the judgment of the Division Bench of the Madras High Court in Section 397/398 petition and both the sides submitted to the court that the petition was essentially one under Section 397 and the court proceeded to consider the appeals as one arising out of [section] 397 petition. In para 39 of the judgment, the court examined as to whether the appellant (holding company) was entitled to relief under Section 397 and it has also referred the same in para 43. In paragraphs 44 to 52, the court had examined the meaning and scope of the work 'oppression '. After examining various issues raised in the appeal, the court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cretionary power to do justice between the parties in the manner it considers fit with a view to protect the interest of the shareholders and the company.... Further, the decision in Needle Industries (India) Ltd. 's case (1982) 1 Comp LJ I (SC), supra, has been repeatedly applied not only by this Board, but also by various High Courts that even when acts of oppression are not established, in facts of a case, appropriate relief/directions could be given. We would not like to deviate from this general proposition applied in various cases on the basis of interpretation given by Shri Sen. Therefore, we are of the view that, depending on the facts of a case, even in cases where oppression is not established, with the view to protect the interest of the Company and the shareholders, suitable order could be passed in exercise of the equitable jurisdiction conferred by Section 397.' For instance, in Yashovardhan Saboo 's case (1993) I Comp LJ 20 (CLB), supra, the dismissal of the petition on the ground that the acts of oppression had not been established would have only continued the deadlock in the management resulting in the winding up of the Company. This was preve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in a deadlock situation in the affairs of the Company. It is already found that the relationship between the shareholders is not reconcilable in view of several of the litigations and that the parties have lost mutual trust and confidence. It is on record that the Company became a member of Bhubaneshwar Stock Exchange Limited and of Interconnected Stock Exchange India Limited as early as in the year 1996, but never carried on, since inception, its main activity, as disclosed in the audit reports forming part of the annual report for the periods between 1995-96 and 2001-02. The landed property belonging to the Company cannot be divided among the 216 existing members and is being exposed to various inevitable risks. The petitioners group consisting of 130 members is willing to sell its entire stake in Company to the respondents, but the latter are willing to purchase the shares of the petitioners only and not the petitioners group in entirety and further they are not willing to sell their shares to the petitioners. The facts set out hereinabove would justify the making of a winding up order on just and equitable grounds, which would however unfairly prejudice the members. The mos ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
