9911796707
TMI Blog2008 (6) TMI 624X X X X Extracts X X X X X X X X Extracts X X X X ..... nical collaboration with principal and/or others and to act as importers, exporters, dealers, distributors, traders, agents, purchasers, sellers representatives for buying selling collaborators, merchandises, stockists, warehouses , transporters of oilfield equipment and also to render engineering consultancy services as engineering, consultants in the field of oilfield in India and/or outside India. 3. Shri Ramesh Singh, counsel for the petitioner pointed out that it was the petitioner who in 1971 founded and promoted a Proprietary concern 'OILFIELD SERVICES' and in the year 1983 the Respondent Company was incorporated by the petitioner taking over the proprietary concern and was, inter alia, involved in the business of providing high-tech Oilfield Services to oil exploration and production companies like ONGC, etc. The total share capital of the respondent company comprised, 1,50,000 equity shares with the petitioner shareholding being 1,46,000, thus, the petitioner held 97.33% of the total issued share capital of the respondent company with the other shareholder being R-4 (brother), R-6 (sister), and the late father of the petitioner. The board originally comprised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stern Engg. Industries Pvt. Ltd., without the approval of the board of Directors of the Respondent company, illegally and without compliance of any applicable laws. It was pointed out that R-8 is now on a desperate mission to install R-3 in the saddle of R-1 Company through oppressions to the Petitioner, in order to cover up his misdeeds during his tenure and save his ICAI membership from cancellation by the institute. 7. Further, it was pointed out by the counsel for the petitioner that it was only towards the end of 2005 that the petitioner came to know about the illegal activities carried out by the respondents with active connivance of R-8. Hence, the petitioner removed R-3 from the board of the respondent company on 14.11.2005. R-2 was also removed from the board on 2.1.2006. The respondents did complain to ROC regarding the aforesaid removal, but the said issue was closed after the petitioner filed his reply to the complaint. But all of a sudden on 22.12.2006, the petitioner received a notice of a purported EGM requisitioned at the behest of the R-3, inter alia, for removal of the petitioner from the board of the respondent company. On receipt of the said requisition/notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he increase in the share capital was not for bona fide purpose as there was no need for fund much less through equity financing in the respondent company and that the said increase was only for the purpose of reducing the petitioner from majority to a minority and instead making R-3 the majority shareholder in the respondent company; (f) 3,10,000 fraudulently created shares were illegally allotted to 7 outsiders; were transferred to R-3 within one year by using them as facilitators to transfer shares fraudulently to R-3, among the 7 facilitators one was Mrs. Vasanti Ramappa Kanchan who is the mother of R-8, it was R-8 who masterminded, plotted, planned and implemented the fraud under the signature of R-3 by exploiting his lack of education; (g) it was part of the money siphoned out of the respondent company by R-3 in connivance with R-8 which was brought back by the respondent to fund the present impugned allotment of shares. 11. Further, the counsel for the petitioner drawing my attention to the acts of mismanagement contended that R-3 diverted the business of R-1 to their own group company like R-5 namely Spectron Engineers Pvt. Ltd. It was contended that money from respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly. Total money paid to Barkha [Rs. 76,78,000.00 and penalty + interest on income tax order dated 31.3.2004 estimated at ₹ 85,00,000.00] is totalling to ₹ 1,61,78,000.00 (iii) Re.: KSB : with no previous business of KSB with the respondent company there is an opening balance of ₹ 5.00 lacs being shown this is not explained, KSB is controlled by R-8 through his wife and mother. The total money siphoned out of the respondent company on this account is to the tune of over ₹ 10.00 lacs approximately which is only the obvious amount derived from the documents. 14. The counsel for the petitioner further alleged that 1.00 lac shares of Spectron held by the respondent company have been transferred in an illegal manner to respondent No. 8's M/s. KSB Eastern Engg. Industries Pvt. Ltd., controlled by Respondent 8 through his mother Smt. Vasanthi R. Kanchan Wife Mrs. Savita Kanchan without any authorization and the said transfer is on mere face value. The total loss to the respondent company on the said account works out to ₹ 78.4 lacs. 15. Further, it was argued that various entries have been made in SCA account which have not been explained. Hence, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this Hon'ble Board in the case of Ganesh Commercial Co. Ltd.-CP No. 64/2004 decided on 30.3.2006 wherein this Hon'ble Board not only set aside increase in shareholding and allotment of shares on the grounds raised herein but also directed the respondents-therein to bring back the money siphoned into the Company. 17. Shri. U.K. Chaudhary, Senior Counsel for the respondents argued that the provisions of Sections 397 and 398 of the Act are not attracted in the facts and circumstances of the instant case. In order to attract the provisions of Sections 397 and 398 of the Act it must be shown that the conduct of the majority shareholders was oppressive to the minority as members. The conduct complained of must be burdensome, harsh and wrongful and mere lack of confidence between the shareholders is not enough unless the lack of confidence springs from oppression of a minority by a majority in the management of the Company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. The Petition does not satisfy the above mentioned necessary ingredients of Sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t undertaking any projects which required large capital. However, 1998 onwards the Company had started taking big projects and for which the funds requirements had increased greatly. The new activities taken up by the R-1 Company necessitated a number of Bank facilities of more than Seven Hundred Lakh Rupees in the form of Bank guarantees, foreign L/C's, Cash credit for working capital etc. 22. However, the internal resources were not adequate to finance the requirements of the Company and the Company was, therefore, constrained to use bank finance for the same. Considering the huge amount of limits sanctioned by the banks, Rs. Seven Hundred Lakhs approximately, the banks insisted for the increase in the paid up Capital of the Company. It was therefore, decided with the full knowledge and consent of the Petitioner that the Paid up Capital of the Company has to be increased from 1,50,000 of ₹ 10/- each to ten lakhs equity shares of ₹ 10/- each. 23. It was argued that pursuant to the decision taken by the Company to increase the paid-up capital of the Company, the friends and close relatives of the Promoters and Directors were requested to infuse share applicati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o gone up as a result of the further allotment, the Petitioner cannot claim ignorance of the allotment of shares in the Company. The Hon'ble Board has also held that unexplained and inordinate delay in challenging the allotments vitiates the plea of unauthorized allotment of shares. In the facts and circumstances of the instant case, share application money has come into the Company over a prolonged period of time (year 1998 to 2003) and has been duly reflected in the Balance Sheet of the Company and has subsequently been converted into share capital by allotment of shares. Further, it was argued that admittedly the Petitioner was the Managing Director of the Company at the time when the infusion of share application money took place and the subsequent allotment of shares had taken place. As per the definition provided in Section 2(26) of the Companies Act, 1956 Managing Director is a Director who is entrusted with substantial powers of management which would otherwise not be exercisable by him. It is therefore, amply clear that the Petitioner being the Managing Director of the Company during the relevant period, cannot be allowed to plead ignorance of the affairs of the Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the above accounts had been opened in State Bank of Hyderabad by these persons only and the R-3 had been made a joint account holder only for the purpose of easy operation, since all these persons were normally staying on Coimbatore / Trichur. The above account was operated either by these persons or by R-3 (who was a joint holder) upon their instructions. The account at State bank of Hyderabad has been opened by R-4 himself. 29. However, the cheque towards share Application money deposited by R-4 had been signed by the R-3 who was a joint signatory and was authorized to operate the account. The R-4 is not entitled to challenge the allotment of shares because as per the provisions of the Articles of Association of the Company, the R-4 was entitled to the allotment of a proportionate number of shares out of the new issue and such his entitlement was only 14,195 number of shares being 1.67% of the equity shares being issued. The R-4 was however, allotted 84,000 shares amounting to 8.99% of the equity capital being issued and the same is in excess of his proportionate entitlement. It was argued that R-4 is hand in glove with the Petitioner and is acting with malafide intention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny for the transfer of such shares vide Cheque No. 762618 dated 30.06.2004 for ₹ 5,00,000.00 and Cheque No. 762619 dated 30.06.2004 for ₹ 7,50,000 both drawn on Mogaveera Co-operative Bank, the transaction was carried out with the full knowledge of the Board of Directors of R-1 Company and after complying with all the requirements under the relevant legal provisions. 33. As regards the petitioner's allegation that the R-3 took out various amounts from the R-1 company through bogus claim like catering charges, etc., and then subsequently brought back the same into the company as share application money and thereby reduced the petitioner to a minority was attempted to be refuted by the respondents. It was contended that the allegations of bogus claims through catering charges are completely false, the R-1 Company had resorted to subcontracting the catering services in order to cut down the cost. Since oil and gas field employees are paid very high salary, the R-1 Company could not afford to maintain the same salary structure to the catering staff. To avoid the cost impact, the R-1 Company decided to route the catering through a sub-contractor. The catering contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts had been made to M/s. Barkha Industries and thereby the funds of the R-1 Company were siphoned off, it was contended that the payments made to Barkha Industries Limited, have been made in the normal course of business of the R-1 Company the allegation of the Petitioner that the R-1 Company did not need such services may be ignored since the knowledge of the Petitioner regarding the business of the R-1 Company is very limited and he is unable to fathom the working and execution of the projects. 37. It was contended that if the details of payments made by R-1 Company are compared with the dates on which the Petitioner is alleging that the R-3 had withdrawn money through Barkha Industries and reintroduced the same as share application money it would be apparent that there is no connection between the two transactions. A major portion of share application money being ₹ 58,84,500.00 amounting to approximately 75% of the total share application money received had been brought into the Company before 31.3.2000 when the R-1 Company did not have any dealings with M/s. Barkha Industries and therefore, the question of any amount allegedly siphoned off being infused into R-1 Compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er he has never been accused of any misconduct and the allegation made in me petition is absolutely without any basis, malafide and with ulterior motives of getting even with one another. It was pointed out that R-8 was appointed as the Statutory Auditor of the company since the year April 1998 by the petitioner on behalf of the company. He had audited the accounts of the company upto and for the year ended 31.3.2005 which was signed by the petitioner, R-3 and R-8 as auditor of the company. It was pointed out that the petitioner had deliberately annexed a copy of the audited accounts for the year ended 31.3.2005, which he has deliberately left unsigned so that he can make wild and false allegations against R-8. It was pointed out that the petitioner had absolute trust and faith in R-8 and the same can be evidenced by the fact that he was handling the personal income tax mattes of the petitioner and had also attended to the scrutiny case under the Income Tax Act and also the Appeal before the Commissioner of Income Tax (Appeals), filing of appeal before the Income Tax Appellate Tribunal (ITAT) on behalf of the petitioner for the assessment year 1995-96 to 2004-05. 42. It was cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g expenditure on commission and brokerage. 46. Further, R-8 denied that R-1 Company suffered any financial loss in respect of the service tax matter on his account or that he was negligent in his professional duties. It was pointed out that the said allegation is bereft of any particulars of the alleged loss. 47. It was contended by R-8 that the allegation that of passing secret/strategic business information of R-1 to R-5 owned by R-3 and his family members was ludicrous, in the first instance, R-3 was a director alongwith the petitioner in R-1 company, he failed to comprehend what secret/ strategic business information could or would be available to him, a mere auditor of the company which would not be available to co-director of the company. Secondly, it was pointed out that the R-1 company is involved in highly engineering based technology, which to a Chartered Accountant is not easily understandable. Thirdly, as the auditor of the R-1 company he was involved in the accounts of the R-1 company and his knowledge of the current day to day activities of the R-1 company were negligible. Hence the question of obtaining any of the alleged information and/or passing off the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . However, apart from making bald allegations, the petitioner has failed to place any material particulars on record to substantiate his allegations against him. With the result that he does not know what are the exact misdeeds that the petitioner is accusing him of having committed. 52. It was reiterated by R-8 that he did not approach the petitioner on the last date of due date for filing income tax returns for taking his signatures on the Balance Sheet for the year 2005 and threatened him about ₹ 1 lac penalty being imposed in case of not filing the documents with the Income Tax authorities before the evening, as alleged. 53. On the contrary, the petitioner had prepared the balance sheet of R-1 for the year 2005. The Board of directors had also approved the same but the petitioner had not signed the same with a malafide and dishonest intentions. When he approached the petitioner for his signature with three copies of the balance sheet, he asked him to file the same without his signatures with a view to settle scores with R-3 in view of his ongoing feud with the said Respondent. However, R-8 refused to oblige the petitioner. Then, the petitioner signed one copy in his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal is in respect of commission received or receivable from them. It was contended that it is inconceivable that any money received from a party as income could be treated or deemed to be withdrawal from the company. 57. As regards, R-8's mother's investment in the shares of R-1, it was contended to be for the sole reason that the risk factor would be less due to existing familiarity with R-1. 58. R-8 denied siphoning ₹ 8.53 crores or any other amount for that matter, as alleged, in fact, because of the ongoing dispute between the directors of R-1. It was pointed out that his professional fees for the year ended 31.3.2005 is still outstanding. 59. Further, out of the alleged amount of fixed deposit of ₹ 1.5 crores purportedly siphoned off by R-8, ₹ 1 crore was shown in the books of R-1 as on 31.3.1998; the company also had a liability of more than ₹ 2.5 crores as on that day; the balance amount of ₹ 50 lacs was in the petitioner's personal name, which could not have been withdrawn by anyone other than the petitioner, Further, it was contended that the balance sheets of the company proves that the entire profits of the company (Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 dated 30.6.2004 for ₹ 5,00,000 and vide cheque No. 762619 dated 30.6.2004 for ₹ 7,50,000. Later, when the question of returning the money arose, R-1 offered shares of Spectron worth ₹ 10 Lacs in lieu thereof towards part payment, this offer was accepted by KSB, the balance amount is yet to be paid by the R-1 to KSB. 65. Further, R-8 stated that the Minutes Book of the R-1 were not handed over to him, the letter dated 22.8.2000 clearly stated that the file containing the draft minutes was being handed over. The same was returned after due verification. In any event, without prejudice to these contentions, it was stated that assuming but not admitting for the sake of arguments that such a minutes book had indeed been retained by him as alleged by the petitioner, then there was nothing to prevent R-1 to commence maintaining a fresh minutes book. R-8 reiterated that the ongoing litigation is just personal animosity between the family members, he has been unnecessarily dragged into their family disputes. 66. As regards the preliminary objections of the respondents that the increase in the paid up share capital which took place from 1999 to 2003 from ₹ 15 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd lack of knowledge of management of company making R-2 and R-3 also take undue advantage of the situation (however, more than 50% of the fruits of misappropriation have been imputed to R-8) and breach the faith deposed in them by their brother. As regards the respondents' allegations of the unclean hands of the petitioner, it is settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Section 397/398. 69. The court exercising equity jurisdiction cannot ignore the two well known maxims of equity - 'he who seeks equity must do equity' and 'he who comes into equity must come with clean hands' The petitioner seeking equitable relief must come with clean hands and good conduct failing which the petitioner would constitute a gross abuse of the process of court, and the petitioner is not entitled for any relief under Sections 397 and 398. As regards the respondents' allegation of the petitioner indulging in acts that are detrimental to the interests of the company, the respondents have failed to prove their case conclusively. These are allegations and counter allegations. Since the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rise. However, it is difficult, if not impossible to lay down specific instances which alone would be considered to be acts of oppression. 72. Whether an act amounts to oppression or not would depend on the facts of a case. Since Section 397/398 proceedings are alternative to a winding up proceedings, it is not that only those grounds which are considered to be just and equitable in a winding up proceedings to be the grounds in a Section 397/398 petition. The words, 'oppressive' is not defined, but it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order but in which the alternative remedy provided by Section 397 by way of an appropriate order might well be opened to the minority shareholders with a view to bring to an end the oppressive conduct on the minority to end the matters complained of. 73. However, proceedings under Sections 397/398 are beneficial provisions to get grie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... naging the affairs of the Respondent Company, resulting in reduction of a majority shareholder to minority at the hands of the minority shareholder respondents for ulterior motive of gaining control of the R-1, the acts complained of being burdensome, harsh and wrongful and lack of confidence having sprung from oppression which involves an element of lack of probity and fair dealing to a promoter CMD holding 97.33% share reduced to 19.20% shareholding though it is a fit case of winding up, the winding up order would clearly prejudice the interests of the petitioner and other shareholders. On consideration of the facts and circumstances of the case and the law applicable in this regard I find that this petition cannot be thrown out at the threshold itself on account of the preliminary objections which I find are not tenable. 79. As regards the petitioner's allegation of fraudulent and illegal increase and allotment of shares reducing a 97.33% promoter CMD to minority [19.20%] in a company established by him and which he had managed and had full control. Though during his troubled times on account of personal difficulty de facto control and management was admittedly handed ove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... % shareholding to 19.20% and expecting petitioner to give his consent which would be nothing short of suicide, the documents referred to and relied upon do not make a full proof case, the originals of the minutes, the notices, the resolutions have not been produced on the pretext that the same are in the custody of the petitioner. No credence can be given to the contention that the petitioner has acquiesced to the increase and allotment as he has not challenged allotment of 46000 shares to himself for three years. 81. The petitioner's case is that he noticed the state of affairs only when he had removed R-3 and R-4 as directors and when R-3 requisitioned an EGM on 22.12.2006, which sounded the alarm bell and made the petitioner inspect the ROC's record to unravel the breach of the faith deposed. Shares allotted to the petitioner without any application and his consent in this regard as well as to R-4, in his case even the cheque for share application money has been signed by the R-3 being co-signatory to the Account, is only to give semblance of genuineness to the share allotments. In the totality of the facts and circumstances of the case, the petitioner's contentio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. The petitioner has pointed out that the Auditor has signed the balance sheets first even before the draft has been duly approved. Then the original record of the purported Board Meetings, notices, minutes, resolutions have not been produced on the pretext that the same are in the possession of the petitioner instead of being available at the Registered office and in possession of the respondents who are de facto in control and management of the affairs of the company. The respondents have not discharged the onus which was on them. As regards the showing of the proper purpose of such increase and allotment, no full proof case has been made out as no such connection of increase and allotment has been proved showing the time and the quantum of funds needed. 84. Further, it is noticed that the respondents have not been able to explain as to how the R-5's shareholding, R-5 being held by R-1 got transferred to R-8's company namely KSB Engineers Pvt. Ltd. on mere face value causing loss of ₹ 78.4 lakhs to the R-1 company. KSB is admittedly controlled by the R-8 through his mother Smt. Vasanthi and his wife Smt Savita Kanchna. 85. As regards the allegation of mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in of events of oppression did not end with illegal increase and allotment of shares, manipulation of records and accounts and misappropriation of funds. Besides reducing the majority shareholder to minority attempt was made to remove him from the directorship as well alleging his indulgence in certain acts detrimental to the interest of the company justifying to hold an EGM on 29.1.2007 to remove him, however, the resolution was deferred by the CLB. 89. In view of the foregoing, to do substantial justice between the parties, I hereby order as follows: I. The notice for the EOGM for removal of the petitioner as Director of the R-1 company is hereby quashed being illegal and unwarranted. II. The illegal issue and allotment of 85 lakhs equity shares on 4 9.2004 being totally mala fide, only motive being to gain control of the company is hereby declared null and void, all allotments are set aside and status quo ante is hereby restored. III. The petitioner is hereby given liberty to get investigative Audit done in respect of the Accounts of the R-1 company for the five preceding years till the date of filing of this petition to get the siphoned off and diverted funds ascert ..... X X X X Extracts X X X X X X X X Extracts X X X X
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