9911796707
TMI Blog2003 (10) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... Sonawala (MCS) and his brother Mr. Chimanlal Chunilal Sonawala (CCS) had commenced a partnership firm under the name and style of M/s. Manilal Chimanlal Co. to carry on bullion trading business. The partnership firm made huge profits and earned good reputation in the bullion and precious metal market. Upon the demise of both MCS and CCS, five sons of the late MCS (Manilal Group) and four sons of the late CCS (Chimanlal Group) became and remained as partners of the family firm of M/s. Manilal Chimanlal Co. Thereafter, in the year 1945 Manilal group and Chimanlal group had incorporated a partnership firm for the purpose of refining and processing gold and silver under the name and style of M/s. National Refinery, with all the members of Manilal group and Chimanlal group as partners of the firm. In the meanwhile the first respondent Company was incorporated in the year 1955 with main objects of, inter alia, to acquire and takeover the business of the partnership firm, M/s. National Refinery with all its assets, liabilities and goodwill. Accordingly the entire business of the firm, M/s. National Refinery was taken over and managed by the Company. Manilal group and Chimanlal group h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... family differences among family members of the different groups for the past over six years, the principles adopted and practice followed by them in regard to equal control and management affairs of the Company were completely ignored by Panalal group, Bhogilal group and Keshavlal group, who acting in collusion as majority indulged in various acts of oppression and mismanagement in the affairs of the Company. The conduct of the majority shareholders is oppressive to the minority shareholders, burdensome, harsh, wrongful and continuous, causing prejudice to the petitioners and other members which resulted in infringement of their legal and proprietary rights as shareholders, warranting remedial measures as held by the Apex Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743. Shri Shah, learned Counsel pointed out that the Company though incorporated as a private limited company is in reality a glorified partnership working for the interests and welfare of all the four groups, as their members. This has been breached with induction of the fourth respondent, belonging to Bhogilal Group as a director and illegal removal of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n account of lack of probity in the conduct of the company s affairs, then it is just and equitable that the company be wound up. u Davis Collett Ltd., In re [1935] 1 Ch. 693 - to show that a company may be wound up by the Court if the court is of the opinion that it is just and equitable that the company should be wound up. Where the capital of a private company is so owned as to make the company in substance a partnership and one director has purported by means of irregularities to acquire complete control of the company and to exclude the other director or directors from the management of it, it may be just and equitable to wind up the company. u Zinotty Properties Ltd. In re [1984] 3 All ER 754 - to show that where a company has been established on basis of trust and confidence of corporators and there is breakdown of trust and confidence among them, then it is just and equitable to order winding up of company. The learned Counsel pointed out the Company having a very good reputation in the precious metal business, would lose the permissions and licenses to carry on the business, in the event of winding up of the Company. Therefore, it would be just and equitable to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders is not enough unless the lack of confidence springs from oppression of the minority by the majority in the management of the company affairs, and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter in his proprietary rights as a shareholder, in support of which Shri Seervai, learned Counsel relied on Shanti Prasad Jain v. Kalinga Tubes Ltd. XXXV CC Page 351. The oppression complained of in any other capacity namely as a director or a creditor is outside the purview of sub-section (2) of section 397, for which reliance was placed on the following decisions:- u Needle Industries India Ltd. s case (supra) to show that the person complaining of oppression must show that he has been constrained to submit to a conduct, which lacks in probity, conduct which is unfair to him and which causes a prejudice to him in exercise of his legal and proprietary rights as shareholder. u V.M. Rao v. Rajeswari Ramakrishnan [1987] 61 Comp. Cas. 20 - to show that the oppression complained of must affect a per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nduct in the management of the Company s affairs, if any, must be supported by particulars. Vague and uncertain allegations of oppression or mismanagement, although they may constitute grounds for suspicion, do not entitle a petition to ask the court to embark upon an investigation into the affairs of a company in the hope that, in consequence of such investigation, something will turn up which will enable the court to grant relief to the petitioner. The matters which transpire after the application made under sections 397 and 398 cannot be taken into account. The ground of challenge not to be found in the petition, but evolved during the course of arguments will have to be ignored. The learned Counsel, in support of these propositions referred to Mohta Bros. (P.) Ltd. v. Calcutta Landing Shipping Co. Ltd. [1970] 40 Comp. Cas. 119 (Cal.), Shanty Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp. Cas. 351 (SC); P.S. Offshore Inter Land Services P. Ltd. v. Bombay Offshore Suppliers Services Ltd. [1992] 75 Comp. Cas. 583 (Bom.) and In re Clive Mills Ltd. [1964] 34 Comp. Cas. 731 (Cal.) According to Shri Seervai, learned Counsel the provisions of section 397 further contemplate t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... other courts in support of which learned counsel referred to Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (P.) Ltd. [1991] 72 Comp. Cas. 211 (Kar.). When a petition is not bona fide but filed obviously for an ulterior purpose with an oblique and mala fide motive, the Court is bound to reject it has held in Palghat Exports (P.) Ltd. v. T.V. Chandran [1994] 79 Comp. Cas. 213 (Ker.) and Smt. Abnash Kaur v. Lord Krishna Sugar Mills Ltd. [1974] 44 Comp. Cas. 390 (Delhi). Moreover, petitioner Nos. 1, 2, 5 7 have been in active management and party to the alleged acts of oppression and mismanagement in the affairs of the Company and the first petitioner having signed the cheques in relation to the transactions of the Company at the relevant point of time cannot claim any relief on account of the principals of in pari delicto conditio defedentis . Shri Seervai, learned Counsel further pointed out that though M/s. National Refinery, the partnership business was converted into the Company with the family members representing the four groups, yet with the participation of M/s. Oriental Chemindus Private Limited a corporate body controlled by some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The petitioners have neither proved the reported understanding and practice of members representing the four groups having equal representation on the Board of the Company nor is binding on the Company in the absence of any such clause incorporated in the articles of the company. Any private agreement between shareholders without being incorporated in the articles of association, cannot bind the company as held in V.B. Rangaraj v. V.B. Gopalakrishnan AIR 1992 SC 453. During the period from 20-12-1965 to 31-12-1969, the Board of Directors consisted of only Kantilal, Mulchand and the ninth respondent. There was no representation from Bhogilal and Keshavlal groups on the Board for a long time though they had equal shareholding in the Company. When Shri Mulchand M. Shah died in the year 1979, the Company was managed only by the members belonging to other three groups. Similarly, there was no nominee from Keshavlal group and Bhogilal group on the Board for the period from 30-8-1986 to 18-10-1986 and 27-11-1986 to 22-3-1987 respectively. When the respondents have denied these allegations, the petitioners have not chosen to enter into the witness box at all, nor produced any document sub ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 20-2-2001 (page 327 of vol.1 of counter) the claim of the Company as barred by limitation and insisted that the Company should settle the amount due to KMC for supply of materials. u The fifth petitioner by a letter dated 28-2-2001 (page 331 vol. 1 of counter) instead of settling the dues of the Company, insisted for settlement of his claim due to him as an employee of the Company. u The seventh petitioner by a letter dated 17-4-2001 (Page 334 of vol.1 of counter) while pleading that the claim of the Company is barred by limitation, demanded the legitimate dues due to him from the Company as an analyst during the year 1997-98. u One Mrs. Amita V. Sonawala, belonging to the petitioners group by a letter dated 30-4-2001 (Page 338 of vol. 1 of counter) refused to repay the loan amount due to the Company on the ground that the claim is barred by limitation. u The first petitioner assumed the responsibility in February 1999 for returning 225 grams of gold taken on approval by the third petitioner which is unreturned till date either by either of them. These acts of commission and omission of various petitioners would not have come to light had the first petitioner con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed the CLB not with clean hands disentitling them from claiming any reliefs. When the respondents have denied all allegations made against them, the petitioners have not chosen to enter into the witness box at all, nor any other witness or produced any documentary evidence, deserving dismissal of the company petition. The learned Counsel emphasized that the general interests of the shareholders should not be sacrificed at the altar of squabbles of directors for power to manage the company as held in Kilpest P. Ltd. s case (supra). 4. In the light of the contentions urged on both sides, I shall now consider the legal position on the point as to whether this is a case to which the principles of partnership are attracted. It is the contention of Shri Shah, learned Counsel for the petitioners that the facts and circumstances of the present case attract the principles laid down in Ebrahimi v. Westbourne Galleries Ltd. [1972] 2 All ER 492, whereas it is contended by Shri Seervai, learned Counsel appearing for the respondents that the principles of quasi partnership cannot apply to a corporate entity. Whether an incorporated company could be considered to be a quasi partnership or not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... neficial reference is invited to the decision in Jagjit Singh Chawla v. Tirth Ram Ahuja Ltd. [2002] 36 SCL 610 (CLB - New Delhi) wherein this Board has held that if the facts and circumstances of a case clearly reveal some basic understanding between parties that fruits of the company would be shared and that the company would be managed on partnership principles, then the said principle could be applied in a section 397/398 petition. It is on record that the late Manilal Chunilal Sonawala s five sons (Manilal group) and late Chimanlal Chunilal Sonawala s four sons (Chimanlal group) had incorporated a partnership firm in the year 1945 for the purpose of refining and processing gold and silver under the name and style of M/s. National Refinery, with all the members of Manilal group and Chimanlal group as partners of the firm. Thereafter, in the year 1955 the first respondent Company was incorporated with main objects of, inter alia, to acquire and take over the business of the partnership firm, M/s. National Refinery. With passage of time when Manilal group and Chimanlal group separated in business, Manilal group took over the control and management of the Company. At present, the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been joint representation on the Board in the management of the Company over a period of over 45 years except during the period between December 1965 and December 1969, during the year 1979 when Shri Moolchand M. Shah died; during the period between August 1986 and October 1986 and November 1986 to 22-3-1987, when the Board was not represented from all the four groups. Thus, it is seen that out of a total period of 45 years of management of the Company by the Board, only for a span of over five years, there was no representation from all the groups on the Board of Directors of the company. At no point of time this joint management has been objected to by any of the groups. There is, therefore, a presumption of unwritten agreement for joint holding and management among family members of various groups. Thus, on an over all assessment of the facts of the instant case, I am convinced that the Company is in the nature of partnership with the understanding of joint holding and management by the family members of various groups and that the principles of partnership are attracted to the case on hand. It is not, therefore, possible to agree with the contentions of learned Counsel for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated requests made by the Board of Directors of the Company. Learned Counsel referred to the statement made by the first petitioner on 29-11-1999 (pages 354-364 of vol. I of reply) and also by the third petitioner on 15-12-1999 (pages 376 377 of vol. I of reply, in regard to the alleged purchase of bogus bills by the Company, misappropriation of stock in the course of refining process etc., which are absolutely false but made with intention to prejudice to the Company as well as its members. When the other directors furnished particulars of the statement made by them in compliance with the decision of the Board of Directors, petitioner Nos. 1 3 did not and acted against the interest of the Company compelling the Board of Directors to re-designate the first petitioner at the Board meeting held on 1-7-2000 as a non-executive director without, however, touching the salary and perquisites enjoyed by him and further suspended the third petitioner from his part-time employment in the Company. The same was not done either with a mala fide intention or with some ulterior motive, in which case such removal is not an act of oppression. The first petitioner was at no point of time removed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the first petitioner under section 132(4) of the Income Tax Act. The final statement made on 29-11-1999 by the first petitioner is found at Pages 354-364 of vol. I of reply in the form of answer to as many as 19 questions put by the Deputy Inspector of Income Tax. This statement relates to a locker kept at Tardeo Branch in the name of the Company, Bank Accounts of S.C. Shah; J.C. Shah and M.C. Shah; detailed description of the Company and nature of its business; constitution of M/s. Vin Vish Corporation Pvt. Ltd. held by the Company and members of the four groups and its nature of business; refining process of precious metals carried out by the Company; suppression of income to the tune of ₹ 54 lakhs by the Company on account of recoveries made from metal dross during the years 1994-95; 1995-96 and 1996-97, diversion of business of the company to M/s. Bhagawati Enterprises, owned by the ninth respondent; misappropriation of the undisclosed income by the Company; shortage of non-ferrous metals at the factory premises of the Company etc. It is pertinent to observe that most of these allegations do form part of the acts of mismanagement arrayed in the Company Petition. The B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). Admittedly, the first petitioner was not removed from the office of director. However, it is on record that when the term of the first petitioner as director came to an end he was not re-appointed on the Board at the Board meeting held on 13-3-2003, subsequent to filing of the petition. When the Company Petition was heard on 26-3-2003, this Bench on the representation made by the petitioners directed the Company to consider name of the first petitioner for being reappointed as director at the extraordinary general body meeting proposed on 31-3-2003. At the said meeting held on 31-3-2003, the resolution to reappoint the first petitioner as a director was defeated by the majority shareholders. Having held that the principles of partnership could be applied in the present case, whether non-appointment of the first petitioner as a director could be considered to be an act of oppression in view of the allegations of the respondents as already enumerated against him, has to be considered. The allegation in regard to the suit claim of the Company against M/s. National Refinery Private Limited, a partnership firm, wherein the first petitioner is one of the partners, is under dispute bef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of various groups. Nevertheless, the practice of engaging the services of the family members by the Company is evident from removal of petitioner Nos. 3, 5, 7 9 from gainful employment. Any removal of the family members from employment of the Company being wholly held by a family attracting the principles of partnership, would constitute an act of oppression. Admittedly, the ninth petitioner challenged his removal before the Labour Court and Industrial Court, which ultimately ended against his favour. Similarly, the Company has given justification for removal of the other petitioners. Whether, their removal is lawful or justified or not cannot be adjudicated by the CLB, irrespective of merits of their claim. Therefore, petitioner Nos. 3, 5, 7 9 cannot agitate before the CLB these grievances under section 397/398 proceedings. Raising of false and bogus claims by the Company :- Shri S.S. Shah - The Company has made a claim against M/s. National Refinery Private Limited (NRPL) for a sum of ₹ 40,44,679.86 towards the outstanding principal amount together with interest as of 30-9-2000, said to be due and payable in respect of goods supplied and delivered by the Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l Meetings of the Company. In this connection learned Counsel relied on the letters dated 19-11-1998, 18-11-1999 and 21-9-2000 of the Petitioners containing in-toto 64 queries sent to the respondents well before the Annual General Meeting for the years ended 31-3-1998, 31-3-1999 and 31-3-2000 respectively, which were not satisfactorily answered at such meetings. The Chairman s speech furnished subsequent to the Annual General Meetings did not contain satisfactory answer to all the queries raised by the petitioners. The respondents with absolute majority brushing aside the queries of the petitioners had adopted the accounts and approved the resolutions at the above Annual General Meetings. Though the Annual Accounts of the Company for the year ended 30-9-2000 had several irregularities and discrepancies, as pointed out in the auditor s report dated 13-9-2000, the accounts were passed without offering any explanation to the auditor s report by reason of the brutal majority held by the respondents. M/s. Lakhani Co., the statutory auditors of the Company for over a period of 30 years, were removed at the said Annual General Meeting for having pointed out the irregularities in the acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re paid each a sum of ₹ 16 lakhs in lieu of the landed property at Khari, Thane District, given back to the petitioner s group. The agenda in regard to the said landed property which came up for discussion at the Board Meeting held on 21-10-2000 was totally unnecessary and irrelevant as there was no necessity to reopen a closed issue. The minutes of Board Meetings were neither properly recorded nor circulated at appropriate time. The respondents never maintained decorum and transparency, while conducting the Board Meetings, but used derogatory and rude language in conduct of the Board Meetings. The forth respondent, belonging to Bhogilal group was wrongfully appointed as an additional director, without prior notice is spite of the opposition made by the petitioners and even while the second respondent from the Bhogilal group is already representing the said group. Therefore, appointment of the fourth respondent as an additional director is in breach of the understanding amount various groups of the shareholders, which would constitute an act of oppression. In this connection, learned Counsel referred to :- u T.V. Prasadachandran Nair v. Anandamandiram Hotels P. Ltd. [2002] ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nnual Accounts of the Company for the year ended 31-3-2000 were duly passed after detailed discussions by the shareholders present on 30-9-2000. The general body of shareholders was compelled to appoint a new firm of auditors namely M/s. Hiten Jiten due to the negligent and behest auditing conduct by M/s. Lakhani Co. Though the Board of Directors had earlier recommended a dividend of 10 per cent the petitioners instead of voting in favour of the proposal for declaration of dividend, abstained from voting on the resolution proposing a dividend of 10 per cent. The fourth respondent was appointed as director by the general body of shareholders at the Annual General Meeting of the Company held on 30-9-2000 for a period of 5 years with effect from 1-10-2000. The action of the majority shareholders in lawful exercise of their power to elect directors and auditors in the best interest of the Company as well as in their own interest cannot be impugned by the minority shareholders. The conduct of the Board Meetings cannot constitute an act of oppression in the affairs of the company. The Board Meetings were duly conducted in accordance with procedure prescribed in the Act. The Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accounts of the Company for the year 1997-98. Though these queries were admittedly explained in writing, the complaint of petitioners that the explanation offered by the Company at the Annual General Meeting was not satisfactory is bald and uncertain. Though vague and uncertain allegations may constitute grounds for suspicion, they do not entitle the petitioners to ask for an investigation into the affairs of the Company as held in Mohta Bros. (P.) Ltd. s case (supra) and P.S. Offshore Inter Land Services P. Ltd. s case (supra). Similarly by a letter dated 21-9-2000 petitioner Nos. 5, 7 9, raised as many as 16 queries arising out of the accounts of the Company for the year 1999-2000, calling for the details of material purchased miscellaneous expenses; legal and professional fees incurred by the Company; non-closure of secured loan; details of insurance account; Bank charges and commission paid, use of the Company s premises and vehicles by certain directors and employees for their personal use, unused plant and machinery, foreign trip undertaken by ninth respondent; actual recovery made from metal dross in the refining process; change of the statutory auditors, appointment of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect minutes of general meetings; inspect register of contracts, register of investments etc. The directors are entitled to enforce their rights bestowed on them by the Statute in ensuring proper and regular conduct of the Board meetings. The grievance of the petitioners that the matter relating to the landed property at Khari, Thane District, a completed transactions was discussed at the Board meeting held on 21-10-2000, in my view, is of no consequence. Merely because the second respondent representing Bhogilal group is already on the Board, induction of the fourth respondent belonging to the same group on the Board cannot be irregular, provided the petitioners group is represented on the Board. Though the shareholders have inherent right to elect any director of their choice, yet, the respondents ought to have ensured the induction of the petitioner s group on the Board for the reasons already recorded elsewhere. Refusal to deliver share certificates to the petitioners : Shri S.S. Shah : There was inordinate delay in delivering the original share certificates to the shareholders belonging to petitioners group. The Company was in possession and custody of these share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed conditions; afforded shorter period and prevented the first petitioner to inspect the records of the Company in spite of the written demands and the lawyer s notice caused by the petitioners. The first petitioner was receiving copies of the accounts just prior to commencement of the meeting of Board of Directors of the Company on account of which he could not ascertain the true financial position and affairs of the Company. Though the first petitioner had called for details of the expenses debited to the accounts of the Company, books of account and records of the Company for inspection, they were not furnished in full and that too belatedly. The first petitioner was denied since January, 2000 access of the minutes of the various meetings of the Board of Directors of the Company, books of account for the year ended 31-3-2000 register of fixed assets and register of contracts in which directors are interested. Though the Company had disclosed ₹ 1.21 crores by way of undisclosed income such income was not reflected in the balance sheet of the Company for the year ended 2000. Thus, the petitioners have been excluded from participating in the day-to-day affairs and management ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o make payment of copper purchased by the Company : Shri S.S. Shah : The Company had purchased from M/s. Kamalesh Metal Corporation ( KMC ) through the third petitioner 1105 Kgs of copper for a sum of ₹ 1,27,861.20, as borne out by the bill dated 5-2-1999 issued by KMC. Though the Company utilized the said copper for production, failed to settle the claim of KMC in full save a total sum of ₹ 25,000 in spite of repeated demands. In this connection, Shri Shah referred to a letter dated 22-10-1999 of KMC issued by way of notice under section 434 threatening to initiate action to wind up the Company in the event of non-payment of the outstanding amount towards purchase of copper by the Company. However, the claim of KMC remains unsettled by the Company. Shri Navroz Seervai : The Company never purchased 1105 kgs of copper from KMC through the third petitioner. The third petitioner, an employee of the Company on part-time basis was never authorised by the Board to purchase copper from KMC. The petitioners 1 3 fraudulently indulged in the said transaction, at the cost of reputation of the Company. Though KMC issued delivery challans on 5-2-1999 for ₹ 1,27,861.20, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r was said to be made on the verbal order placed by the Company through the third petitioner, as borne out by the letter dated 22-10-1999 of KMC. Moreover, non-payment of money by the Company to a third party even if it is true cannot be a grievance of any shareholder constituting an act of oppression in the affairs of the Company. (B) Acts of Mismanagement :- Income tax raids on the Company : Shri S.S. Shah : The Income Tax Department had in the year 1989 raided the Company and residence of its directors for suppression and non disclosure of the true income of the Company resulting in payment of additional income-tax and penalty by the Company to the tune of ₹ 40 lakhs. The Company was again raided by the Income-tax authorities in the year 1999 resulting in an undisclosed income of the Company of about ₹ 1.21 crores and payment of additional taxes penalties, interest etc. of ₹ 76 lakhs. At the time of Income-tax raid during the year 1999 respondent 6 9 were in-charge among other areas, of finance, accounts and administration. Pursuant to the raid, the Board of Directors including the first petitioner at a meeting held on 7-1-2000 had declared an additi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10 years. Later, the Board of Directors at is Board meeting held on 12-5-2000 revoked its earlier resolution dated 7-1-2000, which was opposed by the first petitioner, but for his fear that the statement made before the Income Tax authorities regarding undisclosed income would become false. The Income-tax raid during the year 1999 was engineered by petitioner Nos. 1 3 as a result of the action initiated by the respondents against the ninth respondent, a relative of petitioner Nos. 1 3 for having stolen 500 grams of gold. Learned Counsel for the respondents referred to the statement of the first petitioner made on 29-11-1999, before the Income Tax authorities (pages 354-364), wherein the first petitioner affirmed that there was suppression of income amounting to ₹ 54 lakhs for three years recovered during refining process of the precious metals. The intention of the first petitioner is to destroy the Company by making false statement to the income-tax authorities with ulterior motive. If the petition is not bona fide, the Court is bound to reject it, as held in I. Palghat Exports P. Ltd. s case (supra). The income-tax raids would not by themselves constitute acts of oppre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opposed by the first petitioner. In the mean while, the first petitioner had made the statement before the Income Tax authorities as early as on 29-11-1999 about, inter alia, suppression of income to the tune of ₹ 54 lakhs during refining process of the precious metals, particulars of which were not disclosed, to the Board of Directors without any justification. At the relevant point of time, the first petitioner was looking after the work of development, production, marketing and sales as seen from para 7 at page 12 of the petition. The plea of the petitioners that respondent Nos. 2, 6 9 were in charge of finance, accounts, sales, marketing, commerce and administration at the time of the second raid conducted by the Income Tax authorities in the year 1999 is contradictory to the work allocation in favour of various directors as seen from para 7 at page 12 of the petition, according to which, the second respondent was looking after and managing the day-to-day working of the Company s factory at Jogeshwari and the sixth respondent was looking after the Company s finance. Therefore, the respondents cannot wholly be held responsible for the income-tax raid made on the Company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shwari which was recorded in the Company s records. The claim of the petitioners that these letters are by way of safeguard, in the event of any enquiry by Excise or Sales Tax authorities during the course of transportation of silver is far from truth. Learned Counsel pointed out that the Company used to send anodes and silver bars from Jogeshwari factory to Dharam Kanta for weighing, in support of which he referred to various letters of the first petitioner and vouchers at pages 93 to 108 of surjoinder. Findings : Though 305.95 kgs of silver was said to fraudulently removed by the third respondent during the year 1998, there is no material to show that either the Board was apprised or any complaint given before the police authorities. It is not the case of the petitioners that they came to know of the fraudulent removal of silver only at the time of filing the Company Petition. The extract from guard log book (pages 379-380 of vol. I of reply) dated 3-9-1998, 13-11-1998 and 14-11-1998 maintained at Jogeswari factory contain signature of petitioner Nos. 1 5. Silver was reported to be removed on 3-9-1998 and 13-11-1998 by the third respondent. These extracts show that petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r and books of account of the Company. The Company processes every year materials weighing around 3 tonnes. The sale proceeds of such stock recovered during the refining process by way of surplus were misappropriated and distributed among members of the majority group thereby causing huge losses to the Company and the minority shareholders. Shri Navroz Seervai : The Company had fixed 0.15 per cent per kg by way of refining loss uniformly in lines with the industry standard as a whole including Government of India enterprises such as Bharat Gold Mines Limited (BGML), in support of which learned Counsel referred to the work order dated 21-5-1993 (pages 382-385 of vol. I of reply) of BGML awarded in favour of the Company for conversion of gold into 100 grams standard gold coins, wherein the refining loss has been fixed at 0.15 per cent per kg. The work order given by BGML was executed by the first petitioner. Therefore, the pre fixed loss of 0.15 per cent is not on higher side. Moreover, the petitioners failed to establish that the refining loss was at any time below the pre fixed 0.15 per cent. The first petitioner who was till 1-7-2000 looking after, inter alia, production, marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and gold valued at ₹ 60,000 are recoverable. The value of such metals recovered during the refining process comes to ₹ 18 lakhs per annum for the years 1994-95, 1995-96 and 1996-97. These amounts were not recorded in the books of account of the Company. During the years 1997-98 and 1998-99, there was no recovery of metal dross on account of breakdown of crushing machine at Jogeshwari factory. There is no material establishing the actual recovery made by the Company at any point of time while processing the precious materials. Admittedly, the first petitioner was looking after, inter alia, development, production, marketing and sales till July 2000 as seen from para 7 at page 12 of petition. The plea that the fifth petitioner was incharge of recovery of precious metals until the year 1999 taken in reply is not categorically denied by the petitioners in rejoinder (para 51 at page 96). The first petitioner or the fifth petitioner had at no point of time achieved the refining loss below 0.15 per cent in the course of refining process. The plea of the first petitioner (page 31 of petition) that due to his technical knowledge and expertise he was able to ensure that refining ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss only for ₹ 3,227 as borne out by the Bill, delivery note and invoice at pages 157 to 160 of the petition. The hand-written note (page 161 of the petition) is a fabricated document. This hand-written note does not bear any date, signature, name of the customer, the Company or the second respondent. It is neither addressed to anyone nor received by anybody. The said note is a piece of paper with certain scribblings without any proof that it was written by the second respondent. Learned Counsel reiterated that 1,250 Kgs. of dross could fetch only ₹ 3,227. In this connection, he pointed out that the first petitioner himself sold 18,465 Kgs. of dross during the period from 30-6-1994 to 31-1-1998 on behalf of the Company at the rates varying between Re. 1 per Kg and ₹ 3 per Kg and the special dross at the rate of ₹ 7 per Kg. for which he referred to the various invoices signed by the first petitioner. According to the respondents, the first petitioner misappropriated the difference of sale proceeds of the dross sold from time to time and, therefore, not entitled for any relief on account of the principles of in pari delito conditio defendentis . Findings : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... custody of the Company and not of respondent No. 9. Findings : The Company purchased silver coins from Smt. Surekhaben S. Shah as seen from the invoice dated 13-9-1999. The contentions of the petitioners in the rejoinder (Para 59 at page 107) that silver coins should have been bought by the Company through the ninth respondent is belied by the invoice dated 13-9-1999. Thus the petitioners have neither proved that the Company purchased silver coins from or through the ninth respondent nor in the custody with the ninth respondent and therefore, must fail. Bogus and fraudulent bills : Shri S.S. Shah : The respondents are parties to the practice of bogus bills of purchase being issued to the Company by various third parties without actually effecting sale of the materials, thereby, diverted and sold the materials for their personal gain. The third parties provided bills to the Company without the materials on the basis of incentives given to them by the Company, in support of which reference has been made to the fraudulent bills issued by M/s. K.K. Gems and M/s. Shree Pal Jain aggregating ₹ 4.27 crores and the statements made by the representatives of these suppliers be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liers to sustain the theory of bogus purchase bills issued to the Company. Either the statement of the third petitioner before the Income Tax Authorities is of any evidenciary value without any independent evidence proving the practice of bogus bills. There are a large number of purchase bills issued by among others M/s. K.K. Gems and Shree Pal Jain to the Company (pages 683-866 of vol. II of reply) signed by the first petitioner as well as other directors. Similarly, the first petitioner being in-charge of purchase and sales had signed a large number of cheques on behalf of the Company (pages 393-682 of vol. I of reply) and made payment to the suppliers of precious metal on behalf of the Company which include payments to M/s. K.K. Gems and M/s. Shri Pal Jain for the purchases made from them. These innumerable purchase bills and cheques are admitted to be true by the petitioners. Against this background, the theory of bogus bills of purchase procured by the Company is not supported by any concrete evidence. Personal expenses of foreign visit debited to the Company s account : Shri S.S. Shah : The ninth respondent had visited Africa in January 1998 incurring expenses to the tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d act does not constitute an act of mismanagement in the affairs of the Company. Diversion of business : Shri S.S. Shah : The ninth respondent is conducting identical business pursued by the Company under the name and style of M/s. Bhagwati Enterprises, of which he is the sole proprietor. The ninth respondent has not only been diverting and transferring the business of the Company to his proprietary concern, but also making use of services of the staff and establishment facilities of the Company for his personal gain, thereby acting in a manner which is in direct conflict with the business of the Company and is in violation of his fiduciary duty to the Company. The statement of Bank account of M/s. Bhagwati Enterprises shows that the business address and telephone number therein are the same of the ninth respondent. The supply of goods made by the Company was diverted to one Shri Ram Mandir at Wadala through M/s. Bhagwati Enterprises. Similarly, the order placed by M/s. Adissons Jewelleries Private Limited, a valued customer of the Company, to the tune of ₹ 6,50,000 was diverted by the ninth respondent to his proprietary concern resulting in loss of ₹ 65,000 susta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry (P.) Ltd. from M/s Bhagwati Enterprises is on record. There is no material to suggest that the ninth respondent diverted any order for purchase of palladium by M/s. Addisons Jewellery (P.) Ltd. to M/s. Bhagwati Enterprises. There is not even a scrap of paper to show that the Company had sustained a loss of ₹ 65,000 on account of diversion of business of the company to M/s. Bhagawati Enterprises, out of which an amount of ₹ 38,000 was paid to the company by the ninth respondent. Similarly the claim of the petitioners that the ninth respondent made use of services of the staff and establishment facilities of the company for his personal gain is in no way established. I, therefore, do not find any merit in the plea of the petitioners in regard to diversion of business of the company to M/s. Bhagwati Enterprises. As a result, the plea of losses sustained by the Company on this account must fail. Misappropriation of funds : Shri S.S. Shah : The ninth respondent made use of the cash balances of the Company from time to time without either informing or obtaining prior permission of the Board of Directors of the Company, in violation of the decision taken at the Board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondent, causing no loss to the Company. This complaint according to the respondents is pursuant to suspension of the ninth petitioner from his services on account of the theft of 500 grams of gold in the month of June 1999. Learned Counsel further pointed out that the Company is trading in bullion business which involves huge cash transactions. It is not abnormal to maintain amounts in cash. The amount of ₹ 15,000 and ₹ 3,75,000 kept in cash at Dhanji Street premises represented the advance received from a customer in connection with dealings in precious metals. Moreover, the second respondent is usually looking after business at the Jogeshwari factory who is not expected to be aware of daily inflows and outflows of transactions at Dhanji Street premises. Similarly, the sixth respondent confining to Tardeo Road premises cannot be aware of the transactions at Dhanji Street premises. According to the respondents, the first petitioner unauthorisedly withdrew a sum of ₹ 25,000 in cash from the Jogeshwari factory, in violation of the resolution of the Board of Directors of the Company passed at the meeting held on 27-3-1999, which requires approval of two directors f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was made to exhibits O-1 to O-10. Shri Navroz Seervai : The Board of Directors at its meeting held on 2-4-1999 resolved (a) that the first petitioner sixth respondent would be in-charge of the physical verification of cash and stock at Tardeo Road premises ; (b) that the ninth respondent would be in-charge of the physical verification of cash and stock at Dhanji Street premises; and (c) that the first petitioner and second respondent would be in-charge of the physical verification of cash and stock at Jogeshwari factory premises. Accordingly, the physical verification of cash and stock at Tardeo and Dhanji Street premises were conducted by the first petitioner and sixth respondent as well as the ninth respondent respectively along with the auditors. The physical verification of cash at Jogeshwari factory was conducted in the presence of the first petitioner and the second respondent. The signed, authenticated copies of the physical verification of cash and stock both at the Tardeo premises and Dhanji Street premises and of cash at Jogeshwari factory were submitted by the respective parties. However, before the physical verification of stock at Jogeshwari factory could commen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e technical aspects. I therefore, deny that I was responsible for submitting to the Board of the 1st Respondent Company a copy of the physical verification of stock at Jogeshwari factory. I say that though respondent No. 2 was not there, yet it was his primary responsibility to submit the said statement to the Board. I deny that I deliberately kept the Board in the dark about the discrepancies in the stocks of the low value non-ferrous metals owned by the 1st respondent company as alleged at all. (para 78 at page 142). There is, therefore, no doubt that the first petitioner was in charge of physical verification of cash and stock at Jogeshwari factory along with the second respondent to assist him. At the time of physical verification of stock at Jogeshwari factory, the auditors were present but not the second respondent. The reasons for his absence on account of hospitalization of his wife pursuant to her serious illness are not in dispute. Even if the first petitioner was only to assist the second respondent in physical verification of stock in the absence of the second respondent for valid reasons, it is expected of the first petitioner to ensure submission of the stock veri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ound to be acceptable. Decrease in production lack of factory management : Shri S.S. Shah : The Company s production and quantum of sales since the year 1999 have substantially decreased on account of the mismanagement in the affairs of the Company and diversion of the Company s business to the private business being carried on by the majority group of shareholders. The increase of sales and turnover shown reflected in the balance sheet for these years is on account of the escalation in the value of the price of the products of the company. The work order placed by the State Bank of India with the company for conversion of silver bars into smaller denominations was withdrawn on account of wilful non-compliance with the requirements of the SBI. Similarly, medallion business of the company was declined from 1.25 lakh pieces of medallions to 25,000 pieces during the festive seasons. The company has lost its business to its competitors on account of lack of proper management by the respondents. The respondents by virtue of their majority on the Board of Directors of the company have removed many of the loyal workers of the company so as to suppress the misdeeds indulged by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the price of the products of the company. This plea of escalation in value of the price of the products remains unsubstantiated, without furnishing the facts and figures in regard to the value of the price of the products of the company at the relevant point of time. Admittedly, at the relevant point of time the first petitioner is solely responsible for production till July 2000, in which case the petitioners cannot throw the blame for reduction in production, sales, cancellation of the order placed by the SBI, decline in medallion business of the company and for losing its business to the company s competitor wholly on the respondents, in the absence of any concrete proof. In regard to the plea that the respondents removed loyal workers of the company which resulted in thefts at the Jogeshwari factory, production of sub-standard products and decreased production is not only vague for want of full particulars but also not proved. There is no record to show whether the petitioners have made any complaint before the Board or the police authorities for such theft at Jogeshwari factory. In a petition under sections 397 and 398, all material facts must be set out and supported by ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pleting audit for the year ended 31-3-2000, the company furnished the require-ments from time to time without any delay. When the balance sheet, profit and loss account for the year ended 31-3-2000 were approved and adopted at the Board meeting held on 6-9-2000, the company forwarded the same for the Auditor s report and signature in view of the impending annual general meeting on 30-9-2000. The auditors did not forward their report, in spite of repeated requests made by the company but subsequently asked for the management representation list, which was never asked at any earlier point of time. In the meanwhile, the auditors without considering the management representation list furnished by the company forwarded the Auditor s report on 13-9-2000 with quite a number of qualifications. The management representation letter wantonly ignored by the auditors adequately deals with the qualifications made in the Auditor s report. Though the Auditor s report discloses a loss of ₹ 1,45,697, as against profits of ₹ 8.89 lakhs the detailed workings have not been furnished by M/s. Lakhani Co. Though the auditors had received letters from the petitioners prior to 13-9-2000 pointi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -2000. With adoption of the annual accounts by the majority shareholders at the annual general meeting held on 30-9-2000, the petitioners are bound by the same. For statutory violations, if any, the regulatory authority is at liberty to proceed against the company as well as the officers in default and take such action as may be deemed fit. 6. A careful analysis of the allegations would show that a number of acts of oppression and mismanagement are not falling within the ambit of sections 397 and 398; certain acts complained of are not in the character of shareholders which are outside the purview of sub-section (2) of section 397; quite a few acts lack full particulars without supported by evidence not entitling for any reliefs. The grievances in relation to improper holding of Annual General meetings or Board meetings and denial of inspection to the books of account and statutory records, the petitioners have ample power to exercise their inherent and statutory rights invoking the relevant provisions of the Act. For violations, if any, of the provisions of the Act, the Regulatory Authority will initiate appropriate action. Further, from my findings of each of the allegations, ..... X X X X Extracts X X X X X X X X Extracts X X X X
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