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TMI Blog2019 (1) TMI 387X X X X Extracts X X X X X X X X Extracts X X X X ..... eholders also amounts to oppression of the Appellants. The Impugned Order is quashed and set aside - matter remitted back to the National Company Law Tribunal, Mumbai Bench - appeal allowed. - Company Appeal (AT) No.74 of 2018 - - - Dated:- 7-12-2018 - Justice A.I.S. Cheema] Member (Judicial) And Balvinder Singh] Member (Technical) For the Appellants : Shri Santosh Chauriha and Shri Ashish Verma, Advocates For the Respondents : Shri Siddharth Gautam, Advocate JUDGEMENT A.I.S. Cheema, J. : 1. The Appellants original Petitioners have filed this Appeal against Impugned Order dated 1st December, 2017 passed in TCP 79/2010 (filed on 08.10.2010) whereby National Company Law Tribunal, Mumbai Bench ( NCLT , in short) dismissed the Company Petition filed by the Appellants making grievances of oppression and mismanagement on the part of Respondents. 2. The case of the Appellants as put up before NCLT in the Company Petition in short is as follows:- 2.1 The Appellant No.2 is wife of Appellant No.1 and Appellant No.3 - Anuj Pravin Jain is the son of Appellant No.1. Respondent No.1 Diastar Jewellery Private Limited is the Company concerned (hereafter re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Nos.2 and 3. Accordingly, transfer deed was executed and lodged. Respondent No.1 Company passed Resolution dated 16.10.2007 authorizing the transfer of shares in favour of Appellants 2 and 3. However, the Respondents have not updated the records of the Company to reflect names of Appellants 2 and 3 in these shares. The Appellants filed copies of the Resolution and transfer deed as well as Gift Deed dated 16th October, 2007 with the Petition. 2.5 According to the Appellants, Kishanlal Jain expired on 07.04.2009. Till he was alive, he assured Appellants that he would resolve the disputes between the Appellant No.1 and Respondent No.2. Out of respect for the father, the Appellants did not precipitate the matter. Appellants claimed that in 2008 2009, they came to know the following:- a) Respondents 2 and 3 have floated a company called Diastar Inc., USA in 2008 2009. A gross sum of ₹ 1822.64 Lakhs still remained to be remitted by Diastar Inc., USA to the Respondent No.1 Company. Diastar Inc., USA failed and neglected to remit the export proceeds. The Company was suffering losses because of the conduct of Respondents 2 and 3 (hereafter referred as Respondents ). Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect the Company to transfer 40,77,600 equity shares of Late Kishanlal Jain in favour of Appellants 2 and 3. The Petition also sought appointment of Commissioner to take charge of the statutory accounts and records and for investigation into the affairs of the Company from 2001 onwards. 3. The Respondents filed Reply in NCLT and in short the defence is as follows:- 3.1 According to the Respondents 1 to 3, Diastar Jewellery Private Limited was incorporated in 1987 by Late Shri Kishanlal Jain and family members who were founder of the Company. The Company was new in the filed of jewellery and technology for mechanised jewellery manufacturing was supplied to the Company under a collaboration agreement dated 19.03.1988 executed by the Appellant No.1 as Joint Managing Director of the Company. Under the agreement, Diastar Inc. incorporated in USA supplied machines and contributed towards equity share capital. The agreement was registered with Reserve Bank of India. Respondent No.2 was residing in USA and frequently visited India. Appellant No.1 was entrusted with all the administration and finance of the Respondent Company since incorporation till June, 2004 with a gap of 3 years o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds and Current assets such as Stock in trade and in process and finished goods, Book debts and receivables, stores and spares were Hypothecated to consortium banks , as security for due repayment of cash credit and other loan facilities. The Respondents put the blame on the Petitioners Appellants to claim that they only carried out secured loan already borrowed by the Appellants. They have added (in para - 11 as Reply to para - 9 C-II):- Respondents would like to inform that Bank of India and other consortium bank may declare company accounts as Non Performing assets (NPA) as per the Norms Prescribed by Reserve Bank of India. According to the Respondents, the Appellants withdrew their personal guarantees from the bank. Grievance raised is that the Petitioners refused to pledge their equity shares and thus their intention was mala fide. The Respondents oppose the prayer for appointment of Commissioner. They attached balance sheet as on 31st March, 2010 with the Reply and have shown the shareholding of shares from Late Kishanlal as shares (40,77,600) held by Respondent No.2 Pramod Jain and his wife Anita Jain claiming that Appellants were wrongly showing the same to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Appellant visited the factory. The Reply claimed that the Petition deserved to be dismissed. 4. The Appellant filed Rejoinder in NCLT and NCLT after hearing the parties has dismissed the Company Petition vide the Impugned Order. 5. Regarding the issue whether Kishanlal Jain s shares were transferred to the Appellants, the NCLT considered the two Gift Deeds referred to by the parties and was of the view that since beneficial ownership had already been transferred to Respondents 2 and 3 in the lifetime of Kishanlal Jain and same had been recorded in the share register of the Company, now it could not be said that Kishanlal Jain subsequently gifted his 33% shareholding to original Petitioners 1 and 2 on 16.10.2007. NCLT was of the view that it is established proposition that unconditional Gift Deed executed by any party cannot be revoked unilaterally. The NCLT questioned the Board Resolution dated 16.10.2007 where it was recorded that Kishanlal Jain would continue to be first shareholder till his lifetime and after his demise, the shares would be given to P1 (Petitioner No.1) as the shares had already been gifted to Respondents 2 and 3, but were by then not registered as t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lery exported to Diastar Inc. in USA which was own Company of Respondent No.2 was a device whereby the assets went to Diastar Inc. and were then diverted by Respondent No.2 to themselves and later on, voluntary bankruptcy was sought in US and on that basis the debts of Diastar Inc. USA were written off in India. The huge amounts have thus been siphoned by Respondents. There were no efforts made for recovery of amounts from Diastar Inc. and the debts were simply written off causing national loss in taxes. According to the Appellants, even when CLB ordered appointment of Commissioner which was converted by High Court into special audit, Respondents did not cooperate with the auditors and did not let the investigations take place. Counsel for Appellants referred to the various e-mails sent by the Appellant to show that the Appellants were kept away from the dealings of the Company with ulterior objects which amounts to oppression. The Annual Returns show mismanagement where the Company is suffering huge losses and even statutory dues are not being paid. Counsel pointed out Form 18 (Page 361 of Appeal) of Respondent No.1 - Diastar Jewellery Pvt. Ltd. and referred to the address. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 19.06.2004. When the Company entered into agreement with Diastar Inc., the Appellant No.1 was MD. Referring to the Gift Deed dated 10th December, 2002, the learned Counsel stated that the Respondent No.2 was American citizen and so permission of RBI was required but in spite of efforts, permission could not be obtained and because of that Late Kishanlal Jain transferred the shares making the Respondent No.2 and his wife joint shareholders with Late Kishanlal Jain for which Board Resolution dated 26.04.2003 was recorded and endorsements in the shares were also made as can be seen from copies of share certificates, some of which have been filed as samples with Diary No.7467 by the Appellants. The learned Counsel submitted that the earlier Gift Deed of 2002 which was in favour of Respondent No.2, was not acted upon as RBI did not give the permission. According to the Counsel, as names of Respondent No.2 and his wife have been entered in the share certificates as joint shareholders with Late Kishanlal Jain, subsequently Kishanlal Jain could not have deleted the names of Respondent No.2 and his wife to add the names of Appellants 2 and 3 as done vide Gift Deed dated 16.10.2007 and R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appears to have been associated as Director since 21st February, 2004 although the Reply of these very Respondents states that she did not get the DIN number. The Companies (Amendment) Act, 2006 amended the Old Act to insert new Sections 266A to 266G w.e.f. 01.11.2006 for the first time, providing for requirement to have Director Identification Number with provision of penalty for contravention. The aim and object was to facilitate effective legal action against Directors keeping in view possibility of fraud by companies. The Respondent Company, which has been more of a family affair appears to have continued with such Director against whom both the rival sides do not appear to have had objections considering the fact that if the Respondents 1 and 2 are continuing with a person like Respondent No.3 even during the course of this litigation and involving her in the Company affairs, the Appellants also are relying on the support she gave to Late Kishanlal Jain in the Resolution dated 16.10.2007 (copy of which is filed as Board Resolution at Page 133 of the Appeal), vide which Late Kishanlal Jain joined Appellants 2 and 3 as joint holders with him and which also appears to have bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding ( MOU , in short) (Page 231 of the Appeal) which appears to have been attested on 12th December, 2002 (which would be subsequent to the Gift Deed) which is between Late Kishanlal Jain and Respondent No.2 and still recorded that Kishanlal Jain is desirous of transferring his 33% fully paid up equity shares to the Respondent No.2. Para 2 of this MOU refers to family settlement which can be arrived at between all the member of the family viz Kishanlal Jain, Respondent No.2, Appellant No.1 and the other son of Kishanlal Jain namely, P.K. Jain and their respective spouses. Para 3 of the MOU recorded that a meeting for the purpose would have to be held. Other aspects regarding distribution of assets are then recorded. It is obvious that the Gift Deed dated 10th December, 2002 was not an absolute Gift and it was subject to RBI permission and the content themselves show that Late Kishanlal Jain continued to keep the shares with himself. The MOU also was only a hope of family settlement. The learned Counsel for the Respondents argued that when permission was not received, Late Kishanlal Jain on 26th April, 2003 executed Share Transfer Form (Page 234) and in Board Meet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... il, 2003. It is apparent that the names of Respondent No.2 and his wife Anita Jain were added gratis. No consideration was apparently paid by Respondent No.2 and his wife to Late Kishanlal Jain. When this is so, if the above Resolution is perused which appears to have signature of Late Kishanlal Jain as Chairman, the contents are more in the nature of Will declaring that the joint holders of the shares shall become beneficial owners of the shares after the death of Kishanlal Jain. Such will or wish, which did not transfer rights in the present, were naturally not binding on Kishanlal in the times to come. 12. The physical shares of Kishanlal Jain are all in possession of the Appellants, is not in dispute. Respondents vaguely stated in their Reply in NCLT that the shares were stolen by the Appellants from the factory premises by themselves or through their agents. As the facts appear from the record, this appears to be only a name sake defence. The original shares are all in possession of the Appellants and on directions, the Appellant No.1 filed Affidavit with Diary No.7467 with which he has filed photocopies of a couple of shares. The back side of the front page of the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y signed. The document appears to have been signed by Late Kishanlal Jain, Bharti Pravin Jain and for Appellant No.3 who was then a minor, by guardian - the Appellant No.1. 14. Then there is Board Resolution dated 16th October, 2007 (Page 133). Although Respondent No.2 has claimed that he was MD he still tried to claim that he did not have knowledge of such Resolution. We are unable to accept this defence of the Respondents considering that Respondent No.3 appears to have signed this document along with Kishanlal Jain. The Company was being run more as a family affair in which Kishanlal Jain was the Chairman and admittedly was looking after affairs of the Company in spite of his one or the other children being made MD, to assist him. We are unable to accept the defence that Respondent No.2 did not know about such Resolution being passed. The Resolution No.3 in the Minutes (Page 133) reads as under:- 3. Transfer of shares Smt. Rachna Srimal, Director placed before the Board following documents received by the company from Shri Kishanlal Jain, Director and promotor shareholder of the company. a) Copy of Note sent to Mr. Pravin kumar Jain, Pramodkumar Jain and Prad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low Page 135. When we read the above Resolution No.3 in the document, which is stated to be Board Resolution dated 16th October, 2007, here again what can be seen is Late Kishanlal Jain adding names of Appellant Nos.2 and 3 gratis and without any consideration other than love and affection for his family. With the Gift Deed of 2002 given up by the Respondents in their arguments and even otherwise it was apparently unenforceable for want of permission of Reserve Bank of India, the Gift Deed in favour of the Appellants of 2007 becomes relevant. In 2007, Kishanlal Jain did execute Share Transfer Form as can be seen at Page 135 of the Appeal which was accepted by the Company on the official side, through Respondent No.3. The Affidavit of the Appellant No.1 filed with Diary No.7476 with which copies of some of the share certificates have been filed as samples does show the Respondent Company taking on record the endorsement of Appellants 2 and 3 being added as joint holders with Kishanlal Jain. The Gift Deed of 2007 read with the Resolution dated 16th October, 2007 and the Share Transfer Form accepted by the Respondent Company do show the Will of Late Kishanlal Jain that after his d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... smanagement. We have already referred to the Reply of Respondents which shows that actually the Appellants 1 and 2 separated from the management of the Company on 31.07.2001. Starting 6th December, 2002, the Respondent No.2 has been Additional Director, then Director and Vice Chairman and later Managing Director. Admittedly, initially the Company was doing well. When the management has been with the Respondent No.2 since 2002 and the Company Petition has come to be filed on 8th October, 2010, we are not ready to accept the defence put up in the Reply in vague manner that the building, plant and machinery were already mortgaged by way of depositing title deeds and even the current assets were hypothecated to consortium banks led by Bank of India for which the Appellants should be held responsible. No documents have been shown to us of creation of such mortgage and charge at the time of tenure of the Appellant No.1 but even if it was so, there is nothing shown by the Respondents to show that before Company Petition was filed at any earlier time it was put on record or any grievance was made that the burden of 2001 was so heavy that the Company was unable to come out of the problems e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or after netting off ₹ 129.98 lakhs with creditors outstanding and adjusting the balance creditor of ₹ 833.27 lakhs (the reversal of opening reserves in debtors Creditors was ₹ 6.95 lakhs ₹ 5.77 lakhs). In our opinion netting off ₹ 129.98 lakhs should be done only after prior approval of Reserve Bank of India and subject to liquidators of Diastar Inc. Further the remaining creditor of ₹ 833.27 lakhs should not be adjusted against debtors and provision for foreign exchange loss of ₹ 266.93 lakhs should be provided on total creditors of Diastar Inc. outstanding as on 31/03/2009. Considering the above the total Write off on account of Diastar Inc. should be of ₹ 1787.05 Lakhs and loss is understated to that effect. h) In our opinion the inventories are over valued. While valuing Work in process expenses like Financial Charges, Repairs and Maintenance, Bank charges, Conveyance other Overheads pertaining to non-productive staff not linked to production are considered and the same is not in accordance with Accounting Standard-2 and should be excluded. We are not in a position to quantify the exact amount of such over valuation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s which were pending for more than 6 months and which appears to be running into lakhs of rupees. The Report also recorded that there were dues of income tax and customs duty also. Apart from the Annual Report of 2008 2009, although Respondents filed copy of Annual Report of 2009 2010, even that did not give any rosy picture. The copy of the same is at Page 247 of the Appeal and there is endorsement at Page 256 by the Auditors that the Statutory Registers maintained under the Companies Act were not available for their verification and so they were unable to comment on compliances and entries in the Register. Mere reading of this Annual Report shows it to be a testament of mismanagement. Sadly, NCLT did not examine these details. 19. We have then various copies of e-mails sent by the Appellant to the Respondents copies of which he filed in the NCLT as Annexure 5 (colly) and which copies have been filed in this Appeal at Pages - 161 to 177. Although constantly the Appellant No.1 appears to have been asking for details and particulars of various matters relating to the Company, the Respondents maintained stoic silence and only in the Reply dated 15th April 2010, Respon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dents did not cooperate with the audit and it could not take place. Although the learned Counsel for Respondents is submitting that if the Order of High Court was not complied, procedure of contempt was open to the Appellants, we are not on the question of contempt. What we are finding from the record is that the Respondents have an approach of non-disclosing facts. We have already noted above that the statutory records have not been shown even to the Auditors. 20. The Appellants original Petitioners had filed Rejoinder when the matter was before CLB (Annexure A-3 (colly) Page-328) and in para 6(hh), had pointed out that the Respondent No.1 Company had been declared NPA by Bankers. We have already referred to the Reply filed by the Respondents where they themselves were wanting declaration of the Company as NPA. Further in para 6(pp) of the Rejoinder, the Appellants claimed that the Respondent No.2 or on his behest, a Company by name Diastar India Pvt. Ltd. has been incorporated having its registered office at same address at Plot No.58, SEEPZ where Respondent No.1 is also having its registered office. The Appellants claimed that this showed that the Respondents are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o maintain the Impugned Order passed by NCLT. We passed the following Order:- ORDER A. The Appeal is allowed. The Impugned Order is quashed and set aside. We remit back the matter to the National Company Law Tribunal, Mumbai Bench. We hold that the Respondent Nos.2 and 3 are guilty of oppression of the Appellants and also guilty of mismanagement of the Respondent No.1 Company. At the present stage, passing directions to winding up Company would unfairly prejudice the Appellants and other members of the Company. We leave this aspect open for the learned NCLT, Mumbai to consider at subsequent stage as we are directing investigation into the affairs of the Company. B. Under Section 242(2)(h) of the Companies Act, 2013, we remove Respondent No.2 as Managing Director of the Company. He will, however, continue as Director. We remove Respondent No.3 from the position of Director of the Company. Under Section 242(2)(k) of the Act, we appoint Appellant No.1 as Director of the Company and his continuation subsequent to next AGM, would be subject to decision of the AGM. C. Keeping in view Section 242(2)(a) (k) of the Act, we request the learned NCLT, Mumbai to immediately appo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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