9911796707
TMI Blog2001 (3) TMI 1059X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 51 per cent with the 2nd respondent, 10 per cent with the 3rd respondent and 9 per cent with the 4th respondent. The articles also provides for nomination of 4 directors by the 2nd respondent, 3 by the 1st petitioner, 2 each by the 3rd and 4th respondents. The Chairman is to be the nominee of the 2nd respondent or of the shareholder holding majority shares in the company. The Board has powers to appoint one of the directors as the president or the managing director. The articles also provide that the quorum for the general body meeting shall be 3 members personally present representing each group of shareholders and for the Board meetings one director from each group. The main grievances of the petitioners are that, they are not allowed to have effective participation in the company, the respondents have appointed their own nominee as the MD of the company against the wishes of the petitioners, that the respondents have incorporated another company with the view to divert the business of the company in active connivance of the 6th respondent and that the 6th respondent is guilty of financial mismanagement, diversion of funds of the company and guilty of violation provisions of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is has resulted the company becoming a shell company without any business. When the 6th respondent came up for reappointment as the managing director with effect from 1-2-2000, the fact that he had incorporated another competing company was not disclosed in the resolution circulated. As a matter of fact, he himself is the managing director of the 16th respondent also. Therefore, the consent of all the directors for his appointment as the managing director of the company is required in terms of section 316 of the Companies Act, 1956 ('the Act'), which consent has not been obtained and therefore his appointment as the managing director with effect from 1 -2-2000 is invalid as also the remuneration drawn by him. The managing director being a full lime employee of the company cannot promote a competitor. The worst is that even the registered office of the 16th respondent is housed in the residence of the 6th respondent. Since the company is a consultancy company, the 6th respondent having gained the knowledge, expertise and know how cannot use the same for the benefit of a competitor. Since he is also a director in the company, he is in a fiduciary capacity to protect the inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as also appointed as the MD at the same remuneration. Even though for want of quorum, the meetings did not take place it is clear that the respondents had decided to kill the company after diversion of all the businesses to the 16th respondent. There have been irregularities in the appointment of auditors of the company also. One Gupta Gupta were the auditors of the company for the year 1994-95. In the 5th AGM held on 29-1-1996, these auditors were removed and no auditors were appointed in that AGM. However, the 6th respondent was authorized to appoint the auditors. Accordingly, Gambhir, Nanda Associates were appointed as auditors. Since the auditors were not appointed in the AGM, the company should have approached the Central Government in terms of section 224(3). These auditors are colluding with the respondents in suppressing various acts of financial mismanagement. One of the partners of this audit firm attended 3 EGMs of the company held in Poland even though there was no item relating to the audit were to be discussed in these meetings. The company had to bear all the expenses in connection with his visit to Poland. 5. Summing up his arguments, Shri Sarkar submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Galliver (1942 1AER 378). 6. Shri Gopal Subramanium, the senior Advocate appearing for the respondents submitted as follows: The petition is devoid of any merit. The only substantive allegation in this petition relates to the appointment of the 6th respondent as the managing director to which also the petitioner cannot have any grievance. Initially, this respondent was a nominee of the petitioners. Originally, a nominee of the 2nd respondent was the managing director of the company. In 1994, with the consent of Shri N.P. Gupta of the 1st petitioner company, the 6th respondent was appointed as the managing director for three years, at which time, he was the nominee of the petitioner. However, when the 2nd respondent obtained a contract for execution of a 75 MW Power Station from Gujarat State Electricity Board of the value of about ₹ 200 crores, the 1st petitioner wanted the Indian portion of the contract for about ₹ 20 crores to be given to itself for execution notwithstanding the fact that it should have legitimately gone to the joint venture company. However, with a view to keep the 1st petitioner in good humor, contract worth ₹ 12 crores was given to the 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted 3rd December, 1999 (page 130), the 1st petitioner itself suggested suspension all the activities of the company and as such cannot now complain that the company has no business. As far as the alleged diversion of the business of the company, no diversion could have been possible in as much as the company had executed all the pending contracts and no new business was to come to the company in view of the 2nd respondent having given up the power business. Even though, the 16th respondent had undertaken the contract relating to operation and maintenance contract with M/s Tenughat Vidyut Nigam Ltd., it was negotiated and obtained by the consultant appointed by the 16th respondent way back in 1998 before the dispute started. Further, the company does not deal with O M contracts and therefore the question of diversion of business does not arise. It is also to be noted that after the present petition was filed, the 16th respondent has not entered into any contract. 8. In regard to the report of Shri Gupta, the learned counsel submitted as follows: The report of the auditor cannot be considered in isolation of the fact which lead to the inspection. By a letter dated 3-12-1999, (pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h it can be seen that there is no substance in the adverse comments made by Shri Gupta. Referring to the allegation of the petitioners that the company has an undisclosed foreign account, he pointed out that the invoice at Page 72 of the Rejoinder is a forged one. In this forged invoice, it is shown that this amount was to be made by 'Bank transfer to Elektrim India Ltd. account Warsaw'. There are no particulars about the identification like bank account etc. It is a lake invoice as is evident from the fact that it is made on a containing sheet contrary to the commercial practice. Producing a copy of the original invoice in relation to the same transaction, he pointed out that in this invoice it is very clearly indicated that the amount was to be paid to the account of the company in Corporation Bank, New Delhi indicating the account number. Any way, he submitted that this amount was not paid by the 2nd respondent in view of the cancellation of the agreement as is evident by a letter from this respondent dated 15-6-1998, a copy of which was handed over to this Bench. Therefore, he submitted that the allegation of the petitioners that the company is having an undisclosed acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioners, a large number of allegations have been made against the present auditors of the company, which we have decided not to take cognizance of in view of the fact that these auditors have not been impleaded as parties and they have no opportunity of refuting the allegations. In the same way, some of the allegations in the written submissions, which were not part of the arguments, have not been considered by us. We also note that in the petition, the main allegations related to the events occurred in or after 1999 but in the rejoinder and in the written submissions, the allegations have been made even on events that had taken place prior to 1999. It is on record that the petitioners had been parties to all the events before 1999 like passing of accounts, appointment of auditors, appointment of the 6th respondent as the managing director etc. In the exercise of equitable jurisdiction, the CLB has to take into consideration the conduct of the parties and if a person who has been a party to decisions cannot impugn those decisions later on, on the ground that such decisions amount to acts of oppression. While dealing with the allegations in the petition, we have kept this p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed at para 9.39 of the petition we find that the turn over as well as the profits of the company had shown an upward trend during his tenure. Meaningful participation, as contended by the petitioners, does not mean that without their consent, no decision can be taken. Therefore the complaint that there was no meaningful participation of the petitioners in the management of the company does not stand to scrutiny. Substantive allegations have been made against the 6th respondent only in 1999 after he incorporated the 16th respondent. Even the allegations against the other respondents also relate to post 1999. Therefore, we do not subscribe to the stand of the petitioners that they were denied effective participation in the management of the company till 1999 only on the ground that in spite of their reservation about the 6th respondent, he was appointed as the MD. 14. The next limb of the complaint about the 6th respondent is that he had been allowed remuneration, which is beyond the permissible limit which allegation does not seem to have been made in the petition. In the rejoinder, they have alleged that when the respondent was appointed as MD for 3 years in 1994, his remunerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout complying with this stipulation, the company cannot overcome this by getting the appointment approved by the general body. It is surprising that when the petitioners sought an ex-parte order in the hearing on 21-3-2000 to restrain the general body from passing a resolution to wind up the company as proposed in that meeting, they did not seek any such order in respect of approving the appointment of the 6th respondent as the MD proposed in the same meeting, notwithstanding the legal infirmities pointed out by them. Instead of preventing the appointment by getting a restraint order, now they are complaining about the same. Since the non compliance with the provisions of the Act have been brought to our notice, we direct the company to make a reference to the Central Government in this regard within a month from the date of this order. 16. The next allegation is that the respondents have incorporated a rival company viz,, the 16th respondent with the view to divert the business of the company and as such it is an act of oppression against the petitioners and against the interest of the company. It is to be noted that the 16th respondent is a wholly owned subsidiary of the 17t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioners establish that they could have carried on the business of the company without the assistance of the 2nd respondent, the question of diverting the future business by the company to the 16th respondent does not arise. This being the position, the other cases cited by the learned counsel for the petitioners have no application in facts of this case. Therefore, we don't consider that the incorporation of the 16th respondent by the 17th respondent could be considered to be an act of oppression. In this connection, we may also refer to the various correspondence entered into with the petitioners and the 17th respondent by which the petitioners were trying to have an working arrangement between them and the 17th respondent, even with the suggestion of liquidating the company as well as the 16th respondent. It would indicate that the petitioners are more concerned about their interest than that of the company. The only grievance relating to the 16th respondent that deserves consideration is that if the company had funded any of the expenses of the 16th respondent, then, it should take immediate action to recover the same from the 16th respondent. 17. Another allegation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies, wherein the element of public interest rarely arises. The learned counsel for the petitioners cited the cases of Incab Industries and Richiman Silks wherein this Board had directed investigation. In the first case, the Central Government moved an application under section 237(b) and finding that the affairs of the company were being carried on in a manner affecting various section of the Society, this Board directed investigation. In Richimen the ground for ordering investigation was that, even though it was a listed company, it had failed to convene general body meetings for a number of years and that there had been defalcation of the funds of the company. Therefore, the decisions in those cases are not applicable to the present case. In the present case, most of the remarks of Shri Gupta relate to the improper maintenance of the accounts and non-complying with the Accounting Standards. The allegation relating to having a foreign bank account has been established to be incorrect. Transactions relating to the foreign companies are reportedly having the sanction of the RBI but no evidence has been produced to that effect. The company, even though a 43A company, is, in rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts and funding of profit and loss account. In our opinion, it is a fit case for ordering the inspection of books of account and other records of the company under section 209A of the Companies Act, Accordingly, we order the Central Government to order an inspection under section 209A of respondent company No. 1 on priority basis and thereafter take appropriate action, if any thereafter. We further direct that till such time the Central Government take such view on the findings of the inspection report, the order dated 2-5-2000 regarding maintaining status quo on the fixed assets as well as the deposits of the company will continue. 19. In regard to the final relief to be granted, in cases of closely held companies, this Board has always been directing one of the parties to sell their shares to the other party. In the present case, the respondents have expressed their willingness either to sell their shares to the petitioners or purchase their shares. However, the petitioners were not willing to either of the options till such time the investigation sought for by them is completed. 20. Accordingly, the petition is disposed of without any order as to cost. - - TaxTMI - TMI ..... X X X X Extracts X X X X X X X X Extracts X X X X
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