9911796707
TMI Blog2001 (2) TMI 1042X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriating the funds of the company, disposal of the assets of the company with a view to making it into a shell company and mismanagement resulting in continuing loss to the company. 3. Shri Rajeev Dhawan, the senior Advocate appearing for the petitioners submitted as follows. The company was incorporated as a private limited company in 1974 with members of the family as shareholders. The majority of the shares were held by the family consisting of the 1st petitioner, his brother, the 2nd respondent and their parents. In September, 1989, the company was converted into a public limited company. The authorized capital of the company consisted of both preference as well as equity shares. As on 31 -3-1991, the equity share capital was ₹ 1.4 crores and the preference capital was ₹ 60 lakhs. The petitioners held, at that point of time, 30,090 equity shares and 12,350 preference shares both of ₹ 100 each constituting 22.09 per cent and 33.46 per cent of the respective shares in the company. Similarly, the respondents' group held 47.37 per cent equity shares and 7 per cent preference shares. However, the 2nd respondent, by either issue of further equity shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld also make the allotment as invalid as held by the CLB in Ms. Pushpa Prabhudas Vora v. Voras Exclusive Tools P. Ltd. [2000] 101 Comp. Cas. 300/24 SCL 111 CLB, New Delhi. Further, the respondents have not given any justification for increase in the paid up capital and the only object for allotment of shares was to gain absolute control of the company. In that case as held by the CLB in Dipak G. Mehta v. Shree Anupar Chemicals (India) (P.) Ltd. [1999] 98 Comp. Cas. 575/21 SCL 107, the allotment of shares should be declared as invalid. Thus the 2nd respondent has acted in breach of his fiduciary responsibilities and therefore, the said allotment of shares have to be declared as invalid as held in Dr. Jitendra Math Saha (NRI)v. Shyamal Mondal[l993] 1 CLJ 76 (CLB). Allotment to one group exclusively has been held to be oppressive in Akbarali Kalvert v. Konkan Chemicals P. Ltd. [1994] 3 CLJ 102 (CLB). 4. He further submitted as follows: In the year 1991, the company owed a sum of about ₹ 18.3 lakhs to a proprietary firm Rajaram Maize Products. This firm consisted of the family members and without their consent, 18,300 equity shares were allotted in the name of the 2nd responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -4-1995 as per the directions of the Bench. The onus to prove that notices were sent is on the company, which onus, the company has not discharged. By this act of not sending the notices to the petitioners, the respondents have denied the petitioners any knowledge about the performance of the company. It is the right of every shareholder to get notices for all the general body meetings in terms of sections 171,172 and 173. It is a settled law as held in M.G. Mohanraj v. Mylapore Hindu Permanent Fund Ltd. by Secretary[l990] 1 CLJ 73 and Eastern Linkers (P.) Ltd. v. Dina Nath Sodhi [1984] 55 Comp. Cas. 462 (Delhi) business transacted in meetings without notice to all shareholders is invalid. The law is also very specific about issue of 21 days notice for the general body meetings and the notice period is mandatory as held in Calcutta Chemicals Co. Ltd. v. Dhiresh Chandra Roy [1985] 58 Comp. Cas. 275 (Cal.) and it has also been held that without indicating specifically in the notice for the meeting the business of increasing the capital of the company, the same cannot be increased in the meeting Ramjilal Biswala v.Baitan Cables Ltd. (ILR 1964 14 Raj. 135). When the shareholders are de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds of the company as is evident from the fact that the revenue received from sale of products is much lower than the revenue received by similarly placed companies producing similar products. Page 181 of the petition gives the details of short realization for the years 1989-90 to 1992-93 from which it could be seen that the short realization is of the order of about ₹ 3.3 crores. The short realization reflects the amount siphoned of by the 2nd respondent. He has also manipulated the production records to show under yield and has thus siphoned of the funds of the company. He should be directed to account for the said amount. Further the 2nd respondent, being in sole management of the company, has disposed of a large number of assets of the company even though there was a restraint order from the CLB. By sale of these assets, the company has been reduced to a shell, the figures in the balance sheet for the years 1996-97 to 1999-2000 would indicate that the company has disposed of substantial assets of the company including a factory land in Chandigarh. Now the company is proposing to sell the Bangalore Unit, Inspite of certain orders from the Labour Court and once it does so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be declared as null and void and a Receiver or Administrator be appointed to take over the management of the company. Otherwise, the respondents group should be directed to purchase the shares held by the petitioners at a fair value to be determined on the basis of the status of the company in 1989 before the company became a public limited company as was held by the CLB in Mrs. Farhat Sheikh v. Esemen Metalo Chemicals (P.) Ltd. [1996] 87 Comp. Cas. 290 (CLB). Alternatively, the CLB should recommend to the Government to apply for winding up of the company on just and equitable grounds as the substratum of the company has already gone. 9. Shri Suri, Senior Advocate appearing for the respondents initiating his arguments, contended that this petition has been filed for an oblique motive to put pressure on the 2nd respondent to settle disputes relating to other firms of the family. There are certain proceedings pending in relation to some of the firms of the family wherein the 2nd respondent has sought for rendition of the accounts and appointment of a Receiver etc. in respect of the firm Rajaram Maize Products which is presently under the control of the 1st petitioner. In respect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interest in the affairs of the company, they never sought to subscribe to additional shares. Since the company is a closely held family company, the petitioners cannot disclaim any knowledge of increase in the share capital and in case they had approached the company for allotment of shares, the company would have definitely allotted shares to them also. In regard to the transfer of shares held by the parents to the daughters of the 2nd respondent, he pointed out the parents on their own volition transferred their shares and as such the petitioners cannot make any allegation against the 2nd respondent in this regard. He also pointed out that the percentage holding of the respondent group in September, 1990 together with the shares held by the parents accounted to 63.51 per cent and in 1994, since the parents had transferred their shares to the respondents group, its percentage holding came to 64.43 per cent. In other words, he pointed out that the respondents have not increased their percentage holdings at the cost of the petitioners. He further submitted that with the view to buy peace, the 2nd respondent is willing to offer such number of shares to the petitioners that would res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in 1977 and till 1992, the petitioners never complained about non delivery of the share certificates for over 15 years. Only after the disputes started between the parties in 1992, they raised this issue and complained to the Registrar of Companies and later to the Company Law Board. In accordance with the directions given by the CLB, the company was to issue duplicate certificates subject to the petitioners furnishing indemnity bonds. None of the petitioners except the 4th petitioner furnished an indemnity bond. Even this bond was not in proper form. Therefore, it is the petitioners who did not comply with the directions of the CLB and the company cannot be held responsible for non delivery of the share certificates. He also pointed out that without complying with the directions of the CLB, the compliance of which would have enabled the company to deliver the share certificates, the petitioners have filed a case before the District Consumer Forum, Chandigarh on the same issue and the proceedings are pending. They also complained to the Registrar of Companies, who filed a prosecution for non compliance with the provisions of section 113 of the Act which was later on withdrawn af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iods after 1989, the records of which were always available with the company and were also given for inspection to the petitioners as per directions of the CLB. Further, the Registrar of Companies had examined the records on 6-8-1993 and had also countersigned them. Therefore, the allegation that the records of the company have been fabricated to meet the allegations in the petition has no basis. 15. As far as the allegation relating to the transaction with the firm Rajaram Bros, are concerned, the learned counsel pointed but that the company had been having transactions with this firm even before it became a public limited company. This firm consisted of both the 2nd respondent as well as the 1st petitioner including their father as partners. In the Board Meetings held on 21-3-1989,22-3-1990 and 5-2-1990, the 2nd respondent had disclosed his interest in the firm. In addition', in a general meeting held on 5-2-1990, the general body also was informed of the interest of the 2nd respondent in the partnership firm. Therefore, the contention that the 2nd respondent had violated the provisions of section 299 and has disqualified himself as a director has no basis. 16. The le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the control of the 2nd respondent and that he and his family members who are directors of the company have been actively participating in the affairs of the company and they have given personal guarantees to the banks and have mortgaged their properties on behalf of the company in addition to providing over ₹ 1.35 crores as interest-free loans to the company. Further none of the directors is drawing any remuneration except the 2nd respondent who draws only ₹ 7,500 as remuneration per month. No doubt that the company is having financial problems which has arisen due to interest burden on the borrowings and not due to operational losses. Giving a summary of the performance of the company, he pointed out that the gross sales in 1998-99 of ₹ 529 lakhs went up to ₹ 721 lakhs in J 999-2000 marking an increase of 38 per cent. He pointed out that once the Bangalore unit is sold and the proceeds utilized for clearing the outstandings, the interest burden would come down and the profitability of the company would improve. He also submitted that no minority shareholder can demand winding up of the company when the majority desires to continue with the company. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondents were willing to purchase the shares of the petitioners at the book value and that due to financial difficulties, neither the company nor the respondents would be able to purchase the shares. Thus the compromise efforts once again failed and the matter was fixed for final hearing. The company filed an application CA 155 of 1996 seeking permission to dispose of certain surplus/unusable machinery lying in the Bangalore unit, which was opposed by the petitioners who desired to purchase the same at ₹ 60 lakhs. By an order dated 17-9-1996, we gave them the permission to do so with the direction that the deal should be completed on or before 17-10-1996. Later, it was reported that the petitioners had failed to complete the deal. The company thereafter filed an application, seeking permission to dispose of certain assets of the company that had become unserviceable to augment the resources of the company. After perusing the details of the need for funds and having been convinced that the request of the company was genuine, this bench passed an order on 16-1-1997, permitting the company to dispose of un-usable assets up to the book value of ₹ 50 lakhs with the direction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r they were aware about the decision of the EOGM or they were not interested in getting more shares in the company to maintain their percentage holding. The company had issued further shares of about 40,000 shares during 1991-92 of which about 36,000 shares were allotted to the respondents' group and 4,000 shares to the parents. No shares had been issued to the petitioners' group. Again during 1995-96, about 36,800 shares were allotted, that too, only to the respondents' group. When the company had allotted shares to the petitioners after the EOGM resolution in 1990-91, the company could have offered to the petitioners, further shares when subsequent allotments were made considering the family nature of the company. There is nothing on record to show that the petitioners were offered any shares on these occasions. Even though the respondents have justified the allotment of shares on the basis of the need for funds of the company, yet, exclusion of a particular group of shareholders in the allotment of shares in a family company like the respondent-company has to be considered to be an act of oppression. Therefore, in the normal course, these allotments would have to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Maize Products of ₹ 18,30,000, this is not a matter to be adjudicated by this Bench. The petitioners have already taken appropriate proceedings for recovery of this amount from the company and therefore other than noting that when this conversion took place, the company had failed to comply with the provisions of section 81 of the Act for which we have already given appropriate directions in paragraph 19 above, no further directions are given in this regard. 22. Another allegation made by the petitioners relate to under-selling the products of the company. According to the petitioners during the years 1989 to 1993, the amount of under-selling was to the tune of about ₹ 3.31 crores, which had allegedly been siphoned of by the 2nd respondent. They have compared the working results and sale price of the products of one Sukhjeet Starch Chemicals Limited with that of the respondent company and have alleged under-selling and consequent siphoning of funds by the 2nd respondent. We are generally in agreement with the submissions made by the learned counsel for the respondents in this regard. A perusal of the annual report of Sukhjeet indicates that as on 31-3-1991, it had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... director by virtue of the provisions of section 283(l)(i). They have also alleged that the records produced by the respondent to evidence his disclosure are fabricated. It is on record that even when the company was a private company, it was having transactions with the said firm in which the 2nd respondent as well as the petitioner brothers were partners. As per section 299, a director has to disclose his interest in any contract or arrangement and in the instant case, since contracts were entered into with a firm in which the 2nd respondent was a partner he should have disclosed his interest. The scope of the 'disclosure of interest' in this Section was examined by this Board in A. Sivasailam v. Registrar of Companies [1995] 83 Comp. Cas. 141 (CLB) and it came to the conclusion that the term disclosure would mean to make others aware of which they were not aware to mean that if the other directors of the Board are otherwise generally aware of the interest of a director in an arrangement or a contract, then the non disclosure in a Board meeting would not attract the penal provisions. In the present case, the Board of the company consisted of family members and the firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this petition. The petitioners had also taken inspection of the same documents authenticated by the ROC. Therefore, it is possible that the FIR filed on 18-3-1992 did pertain to records prior to 1989 as contended by the respondents. The petitioners have raised this issue of fabrication of records more with reference to the minutes of the EOGM held on 5-2-1990 wherein it is recorded that the 2nd respondent had disclosed his interest in the firm and that the general body had passed a resolution in terms of section 81 (1A). Any way, we have held in the earlier paragraph that in the facts of this case, non disclosure could not have attracted disqualification and that notwithstanding the resolution under section 81(1A), the petitioners should have been offered shares when further shares were allotted. 26. Yet another allegation relates to disposal of assets of the company on the ground that such sale of assets has resulted in the company turning out to be a shell company. In the hearing held on 1-12-1994, this Bench had recorded an undertaking by the counsel for the respondents that the company would not sell its assets. By a contempt application CA 19 of 1996, the petitioners al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value nor that any asset had been sold without need for funds. However, the petitioners complained to this Bench that in violation of our order dated 16-1-1997, the company had issued an advertisement for sale of the entire Bangalore Unit, the book value of which was more than ₹ 50 lakhs. During the hearing of the application, the petitioners also suggested that the company, in exchange of the shares held by the petitioners, could transfer the Bangalore Unit so that the disputes between the Parties could come to an end. This suggestion was not accepted by the respondents as according to them the value of the Bangalore unit was much higher than the value of the shares. Therefore, we modified the earlier order on 3-6-1999 stipulating that if the company were to sell any asset other than in the normal course of business, our permission should be obtained. The respondents filed CA 164 of 1999 seeking disposal of various unusable assets. A detailed order was passed on 19-8-1999 giving permission to the company to dispose of the assets mentioned in the list furnished by the company subject to the condition that full details of the sales should be furnished and that the considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore relief relating to purchase of the shares of the petitioners by the respondents was sought. The learned counsel for the petitioners sought for a direction that the respondents should purchase the shares of the petitioners group at a value to be determined as in 1989 or in the alternative we should direct the Central Government, to apply for winding up of the company. He relied on a number of cases to substantiate his prayers. In regard to direction for purchase of shares, this Bench has generally taken such a decision in cases where the companies had been closely held or where both the groups had participated effectively in the management of the company and that one group had, by acts of oppression, ousted the other group and that restoration of the shareholding would only result in further disputes or deadlock in relation to the affairs of the company. In the present case, while we have held that the allegations of acts of oppression have been established, we have also held the other allegations have not been established and to put an end to the acts of oppression complained of, we have given suitable direction. Further, none of the petitioners was an original promoter of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase and sale. To come to that conclusion the Court had relied on Maharani Lalita Rajya Lakshmi v. Indian Motor Co. (Hazaribagh) Ltd. AIR 1962 Cal. 127 wherein he had observed It is also proper to emphasise that the power of the court to make such order, as it thinks fit under section 397(2) of the Act is expressly stamped with the purpose of 'bringing to an end the matters complained of. Therefore wide as the power of the court is flowing from words of expression 'such order as il thinks'. It is nevertheless controlled by the overall objective of this section which must be kept strictly in view that the order must be directed 'to bringing to an end the matters complained of. The marginal note of section 397 of the Companies Act shows also that the purpose of the order of the court in this section is to give 'relief in case of oppression'. However, in Karelda Suryanamyana v. Sri Ramdas Motor Transport Ltd. [1999] 3 CLJ 422, this Board, considering the fact that the company was family company, ordered the company/respondents to purchase the shares held by the petitioner, even though the respondents were unwilling, as the unwillingness was not on account of f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir decision to purchase the shares. The consideration for the shares at the fair value determined will be paid within 3 months from the date of the valuation report and on receipt of the consideration, the petitioners will hand over blank instruments of transfer to the respondents along with the share certificates, duplicates of which, we have already directed for issue within a month. In case, the respondents are not willing to purchase the shares of the petitioners, the same should also be communicated to the petitioners within a month. Thereafter, the petitioners are at liberty to apply for such number of shares that would restore their percentage holding of the equity shares to 22.09 per cent. Once the petitioners express their desire to do so, then the respondents will be bound to get that number of shares transferred from their group on receipt of consideration for the same at par at which the shares were earlier allotted. In case of all future issue/ allotment of shares, the petitioners should be offered shares on a proportionate basis by registered post Ack. due. 29. The learned counsel for the petitioners has made an alternate prayer for directing the Central Government ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mplaining that in violation of the earlier order of the Bench dated 1-12-1994, the company had advertised for sale of Sorbitol plant. This application did not survive once the petitioners themselves had offered to purchase the same for ₹ 60 lakhs (which did not materialize). The second is CA 128 of 1999 complaining about issue of an advertisement by the company for sale of the plant and machinery at Bangalore Unit in violation of the order of this Bench dated 16-1-1997 which had restricted the power of the company to sell unusable assets beyond a book value of ₹ 50 lakhs and that the plant and machinery at Bangalore was more than ₹ 50 lakhs and, thus, the respondents had committed contempt. Since no sale had taken place pursuant to the advertisement we do not consider that the respondents had committed any act of contempt. As a matter of fact, after the said application was filed, we had directed the company by an order dated 3-6-1999 not to dispose of any assets of the company except in the normal course of business, without our approval. Therefore, this application also does not survive. 31. With the above directions, observations we dispose of this petition ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
