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TMI Blog2008 (5) TMI 736X X X X Extracts X X X X X X X X Extracts X X X X ..... ectors and members of the Company conducted without notice to the petitioner are null and void; (d) to declare that the proceedings and resolutions of all meetings of board of directors and members of the Company held with the illegal participation of the fourth respondent are null and void; (e) to restrain the respondents 1 to 3 from altering the share capital of the Company or parting with any of the assets of the Company to any third party or creating any third party rights on those assets of the Company; and (f) to restrain the respondents 1 to 3 from diverting any business of the Company to the fourth respondent or any other party and further restrain the fourth respondent from dealing with customers of the Company. 2. Shri Sudipto Sarkar, learned Senior Counsel, while initiating his arguments submitted: The Company was promoted by the second respondent in January, 1988 with main objects of carrying on the business of manufacturers and dealers of all kinds of industrial, commercial and domestic moulds. The petitioner entered into a Joint Venture Agreement dated 22.11.1995 (JVA) and Know-How Agreement dated 01.08.1996 ( KHA ), pursuant to which the petitioner bec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rehabilitation measures, is contrary to the stipulation imposed by the petitioner in retaining 70% of shares of the Company. There is no document on record to show that the petitioner ever agreed to dilute its shareholding from a majority to a minority shareholder by implementing the capital reduction and thereafter allotting shares to the fourth respondent which is in the same business, as that of the petitioner and the Company. 5. The petitioner and its nominee IP Support were not given notice of the extraordinary general meeting held on 30.12.2002 at which the capital reduction to 10 percent of the original share capital was approved and of the extraordinary general meeting held on 25.01.2003 at which the authorised share capital was increased. The Company claims that notices of these extraordinary general meetings were published in local newspapers, fulfilling the legal requirements, but the said publications cannot be a substitute for statutory notices. It is, therefore, apparent that the respondents' conduct lacks bonafides and probity. 6. The Supreme Court has held in M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi and Ors. (2003) 4 CLJ 185 that notice should be giv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld in Gluco Series Pvt. Ltd. and others, In re (1987) 61 CC 227; and Puneet Goel and Ors. v. Khelgaon Resorts Ltd. and Ors. (2000) 38 CLA 259. It is equally well settled that in matters relating to allotment of shares a fiduciary duty is owed not to change the shareholding pattern to the detriment of a shareholder, as reiterated in Howard Smith Ltd. v. Ampol Petroleum (1974) AC 821; and Gluco Series Pvt. Ltd. and others, In re (1987) 61 CC 227. 9. The Company had removed the nominee directors of the petitioner with effect from 13.01.2003 by illegally invoking the provisions of Section 283(1)(g) of the Act for allegedly not attending three consecutive Board meetings, without seeking leave of absence. The JVA does not give any scope for vacation of the office of director, in terms of Section 283(1)(g) of the Act. The Company should give 30 days written notice of every board meeting to all directors, unless the petitioner agrees in writing to a shorter notice. Any notice to a director abroad, must be given by registered airmail letter and telex or telefax, as the case may be. Every notice of the Board meeting should contain the agenda of the business to be transacted at such meeti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required under the JVA were given to the nominee directors of the petitioner and further his motive to remove the petitioner's nominees from the office of director of the Company. 11. At the request of the second respondent in terms of his communication dated 08.12.2003, the petitioner by its communication dated 15.12.2003 furnished the names and addresses of directors nominated by it to be on the board of the Company, but none of its nominees was appointed as a director of the Company. Any unilateral action taken which results in vacation of office of a director without notice to him and without providing him with an opportunity to seek leave of absence is bad in law, as held in Dr. Kamal K. Dutta v. Ruby General Hospital (2000) 36 CLA 214; and Tea Brokers P. Ltd. v. Hemendra Prosad Barooah (1998) 5 CLJ 463. In view of this, the vacation of office of director by the petitioner's nominees has to be set aside. 12. The extraordinary general meeting held at the request of the petitioner on 29.12.2003 was dissolved for lack of quorum on account of the manipulations of the second respondent. The petitioner, otherwise, being a majority shareholder, would have been successfu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... minutes of the meeting dated 06.09.2001 signed by the group Chairman and Managing Director of the petitioner as well as the second respondent and the communication of the petitioner sent pursuant to the proposal dated 01.12.2001 would reveal that the shareholding of the petitioner and the second respondent would be in the ratio of 75% and 25%. The petitioner's increase of shareholding upto 75% must come from the shares which should be purchased from outside shareholders and should not be achieved by capital increase. The e-mail message sent on 11.02.2002 by the second respondent also suggested that the shareholding of the petitioner and the second respondent would be in the ratio of 75% and 25% under one of the models and further suggested the ratio of 50% and 50% between the petitioner and the second respondent, which was not acceptable to the petitioner. It was never agreed that the second respondent would take majority shareholding in the Company, reducing the status of the petitioner into a minority shareholder and further wanted to be in the management of the Company. 15. The 14th Annual Report of the Company for the year ended 2001-2002 indicates that a sum of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... veral provisions of the Act. The Company has not complied with the statutory requirements in connection with sending of notice of the 15th annual general meeting, drawing of balance sheet, minutes of the general meetings and board meetings, retirement of directors etc. The balance sheet, profit and loss account suffered from several infirmities on account of manipulation of accounts at the instance of the second respondent. The second respondent is further guilty of non-furnishing of several of the details, as required by the petitioner, in the affairs of the Company. ' 19. In a case of oppression, resulting from failure to give notice of Board and general meetings, the most appropriate relief would be to cancel/set aside the allotment made without notice, restore the position prevailing prior to the illegal allotment and direct the calling of a general meeting by the shareholders in accordance with law, so that decisions pertaining to the Company can be taken as held in Puneet Goel and Ors. v. Khelgaon Resorts Ltd. and Ors. (2000) 38 CLA 259; M.M. Subrahmanyam and Ors. v. Gulf Olefines P. Ltd. and Ors. (2002) 6 CLJ 454; Dale and Carrington Investments P. Ltd. and Anr. v. P. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties of the Rheinnadel Group in the field of sewing machine needles with effect from 01.11.2003. The petitioner ultimately abandoned the Company, even before initiation of the present proceedings and therefore, the petitioner has no locus standi to prosecute the company petition. The petitioner has categorically made it clear that it cannot invest any more in the Company. The balance sheet for the year ended 31.03.2005 of the petitioner discloses that the only fixed assets consist of the shareholding in the Company, valued at a mere one Euro (₹ 58 only) and has no other assets, whether fixed or current. The capital is only 511,292 Euro; which is unavailable in the company and shown as loan to the shareholder, proving that the capital is only a mere book entry. The balance sheet shows that there is no money receivable from the Company. The notes on accounts forming part of the annual financial statement as at 31.12.2005 show that the petitioner's holding in the Company is 26.14%. This would conclusively prove that reduction as well as issue of capital was always in the knowledge and with the consent of the petitioner. 24. The petitioner has thus, become a shell company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar relief; (b) Srikanta Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estate Enterprises (Pvt.) Ltd. (1991) 72 CC 211 that the relief under Sections 397 398 is an equitable relief which is entirely left to the discretion of the Company Court. Mere proof of the allegations under Section 397 398 would not entitle the petitioner to the reliefs sought for when these reliefs are discretionary reliefs and they will be granted only to persons who approach this Court in good faith and the parties who approach this Court for equitable reliefs must come with a clean record; and (c) Desein Private Limited v. Elektrim India Limited (2001) 3 CLJ 459 that the CLB, in the exercise of equitable jurisdiction, has to take into consideration the conduct of the parties and if a person who has been a party to decisions cannot impugn those decisions later on, as the ground that such decisions amount to acts of oppression. Any statutory violation on the part of the Company is not remediable in a Section 397/398 petition. 26. The petitioner failed to provide a careful planning on the project and its correct transfer of technology, which resulted in huge losses suffered by the Company, as ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ami of the competitor is not in a position to fund the Company and it is only the competitor who will invest, which is prejudicial to the interest of the Company. and if allowed, the factory of the Company will be closed. 29. The notice of extraordinary general meeting dated 02.12.2002, held on 30.12.2002 for reduction of the share capital, was sent to all the shareholders, including the petitioner and IP support which is supported by payment voucher of ₹ 1520/-. Similarly, the notice dated 31.12.2002 convening an extraordinary general meeting on 25.01.2003 to pass a special resolution under Section 81(1A) for issue of shares, to the promoters, including their associate companies was sent to all the shareholders, including the petitioner and IP support as seen from the payment voucher of ₹ 1520 issued by Tally Solutions Private Limited. The Company published notices dated 02.12.2002 and 31.12.2002 alongwith explanatory statements in Tamil dailies dated 03.12.2002 and 04.01.2003, circulating in the district in which the Registered Office is located, convening the extraordinary general meetings on 30.12.2002 and 25.01.2003 for reduction of the share capital under Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ioner thereafter, never requested for any meetings at all. When the petitioner, by its communication dated 26.11.2003 terminated the JVA, the Company never claimed any relief before the CLB, but instead approached the High Court and challenged the termination of the JVA. 33. Notice is required to be served as per Section 286 of the Act only to directors of the company. The petitioner is not a director and, therefore, this section has not been violated. The petitioner has no locus standi to make any complaint of non-receipt of notice either under the Act or under the Articles of Association. It is only directors who are entitled to notices and no director has ever complained to the Company of not receiving any notice of the board meetings nor is any of them parties to the petition. The petitioner's nominees never attended any board meeting or shareholders meeting over the last eight years, before vacation of the office of directors of the Company. Section 286(1) contemplates notice to directors, but not to directors abroad. The articles of association do not also deal with sending of notices to directors residing abroad. Nevertheless, every important decision in relation to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31.03.2006 and ₹ 1.50 crores for the year ended 31.03.2007. 37. The respondents thus, have taken a series of actions beneficial to the Company. The petitioner on the other hand acted against the interest of the Company by terminating the JVA and other agreements, after the competitor took over the needle business of the petitioner. The JVA empowers the respondents to acquire shares of the petitioner and the Company should not go to the competitor. The petitioner cannot any more fulfil the terms of the JVA and technical obligations. The petitioner failed to honour its commitment to purchase needles manufactured by the Company, by terminating the arrangement in November, 2003. The petitioner cannot, therefore, either claim any relief under Sections 397 and 398 or invoke the provisions of the JVA enforcing the contractual obligations. 38. The petitioner is not a director, entitled for any notice. The nominees of the petitioner never complained of non-sending of notices of the board meetings. The nominees being foreigners are residing outside Indian and do not have an Indian address. The articles in the present case provide that notice is to be sent to directors for the ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not entitled for any relief on account of any isolated incident, which is not continuous in nature. The petitioner not only sold the needle business, but also closed down the needle operations in the year 2004. The petitioner entered into a non-compete pact with Groz Beckert, which prevents the petitioner from entering into needle business ever again. In view of this, if the petitioner takes control of the Company, it will lead to closure of the Company. For these reasons, the present case is distinguishable from other cases, namely, (i) Dale and Carrington Investments P. Ltd. and Anr. v. P.K. Prathapan and Ors.; (ii) Tea Brokers P. Ltd. v. Hemendra Prosad Barooah; and (iii) Combust Technique P. Ltd (supra). 45. I have considered the pleadings and arguments advanced by learned Senior Counsel. In the facts of the present case, I deem it fit, first and foremost to consider the background, formation and management of the affairs of the Company as well as the tie-up arrangement on technical front between the petitioner and the Company, towards accomplishment of the main objects of the latter, which will throw light on the veracity of various charges put forth by the petitioner and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to their shareholding. The second respondent shall not directly or indirectly either by himself or through his nominee, increase his beneficial interest in the share capital of the Company beyond the stipulated proportion, namely, 26% (Clause 4). The minutes of the meeting held on 06.09.2001 to which M.K. Pavel, Mr. Gerdf Krieger and the second respondent were parties, do reinforce the shareholding of the petitioner and the second respondent in the ratio of 75%: 25%. The Company shall not allot and/or register any shares in the name of a nominee of any of the parties to the JVA unless such a nominee prior to the allotment or registration has given an undertaking to abide by the provisions of the JVA (Clause 6). Unless and otherwise agreed, the petitioner and the second respondent shall be equal partners and shall have equal rights in all respects. (Clause 7). Clause 8 deals with the constitution and configuration of the Board of Directors of the Company. Clauses 9 10 are in relation to appointment of the Chairman, Managing Director, retiring and non-retiring Director(s). The Company shall give 30 clear days written notice of every meeting of Board of di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Potentially Sick under Sick Industrial (Special Provisions) Act, 1985 (S1CA) and consequently the directors of the Company comprising of the respondents 2 3, Mr. Gerdf Krieger and Mr. K. Pavel at the board meeting held on 29.08.2000, recognising the seriousness of the situation, deliberated the causes for erosion of the capital of the Company and had taken a series of decisions which shall include share capital reduction and infusement of additional capital, towards which the second respondent was authorised to take all necessary steps. 52. The report with Mr. Thulasi remarks on the financial situation of the Company elaborating the reasons for accumulated losses and measures to be taken for betterment of the Company, which is admittedly found to be forwarded by the petitioner to the second respondent by an e-mail on 31.07.2001 included among other aspects - (a) reduction of share capital in order to erase accumulated losses; (b) capital increase; (c) increase of price for needles supplied to RHEIN; (d) increase of sales of needles in Indian market; (e) interest on ECB loan; (f) expansion project etc. It could be seen that these financial aspects of the report represented t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the minutes on record, the relevant part of which is furnished herebelow: The Rheinnadel shareholders and the board decided to close down the manufacturing activities of the needle division in Germany due to increase in the cost of production, pressure on selling prices, making the needle manufacturing in Germany unprofitable. The petitioner was holding discussions for sale of its shares in the Company, in favour of Schmetzs or Groz Beckert as the case may be. The second respondent expressed his disappointment that the petitioner was holding discussions with Schmetz and Groz Beckert on selling its shares without any intimation to him. The petitioner required substantial funds for closing manufacturing operations in Germany, towards payment of compensation to its employees and, therefore, the petitioner's objective was to realise substantial funds by sale of its shares in the Company so as to settle the compensation in favour of its employees. The board of RHEIN was unwilling to make any additional investments in needle business. 56. The discussions between Mr. K. Pavel and the second respondent in May 2003, as reflected in a letter of confirmation da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... twhile Managing Director of the petitioner and director on the board of the Company became employees of Groz-Beckert, that Groz Beckert would market the brands of the petitioner namely, RHEIN, BEKA, MUVA and Lammertz, that the needle factory of the Rheinnadel group in Aachen, Germany would be closed permanently during the year 2004 and that the needles for RHEIN, BEKA, MUVA and Lammertz would be directly supplied by Groz Beckert. The reports published in various German newspapers in October 1993 and January 2004 confirmed the closure of the needle production by the Rheinnadel group, which would result in retrenchment of 150 workers and the Groz Beckert group taking over the needles sales of the Rheinnadel Group under the brand name Rheinnadel. 59. A careful consideration of the sequence of events would reveal that the parties have been repeatedly discussing from time to time since March 2000 onwards the financial restricting of the Company, which shall include reduction of share capital, confirmed by the High Court of Madras by its order dated 13.11.2003 and reflected in the annual financial statements of the petitioner as at 31.12.2005, increase of authorised capital, issue of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Calcutta High Court in Dr. Kamal K. Dutta v.. Ruby General Hospital (supra), by sending notice of the extraordinary general meetings to the petitioner located abroad. In view of the adequate documentary proof on record for sending of the notices of the extra ordinary general meetings to the petitioner the decisions in M.S. Madhusoodhanan and Anr. v. Kerala Kaumudi and Ors. and M.M. Subrahmanyam and Ors. v. Gulf Olefines P. Ltd. and Ors. (supra) will be of least assistance to the petitioner. Therefore, the publication of notices of the extraordinary general meetings for passing of necessary resolutions in connection with the reduction of share capital, increase of the authorised capital and issue of further shares in favour of the promoters, even though the petitioner is located abroad, do not really make any difference. It would be appropriate to point out at this juncture that notices dated 12.07.2003 on hearing on C.P. No. 240 of 2003 on the file of the High Court of Judicature at Madras for confirming the reduction of the share capital of the Company are found to be advertised in Tamil dailies, circulated in the neighbourhood of registered office of the Company. The petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (P) Ltd., In re and Tea Brokers P. Ltd. v. Hemendra Prosad Barooah (supra). The Calcutta High Court while laying down the general proposition that a majority shareholder should not ordinarily be directed to sell his shares to the minority group of shareholders, the same has been made permissible in unusual circumstances, depending upon under whose control the company would be benefited. It is, therefore, evident that the decision as to who should go out of a company would depend on facts and circumstances of each case. 64. This Board recently in (a) C.M. Jain v. CRM Digital Synergies Pvt. Ltd. (2008) Vol. 142 CC 658 directed one of the promoters holding 80% shares to sell his shares to the other promoter holding 20% shares primarily on the ground that it was the minority shareholder who was managing the affairs of the company and that by entering into an agreement to sell his 80% shares, the majority shareholder had disassociated himself from the Company; and (b) Himachal Futuristic Communications Limited v. Creative Properties Private Limited C.P. No. 123 of 2006 directed the petitioners, despite holding majority shares to sell their shares to minority shareholders in view of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioner. In these circumstances, the impugned allotment can neither be illegal nor oppressive of the petitioner. Therefore, there is no question of diversion of any business of the Company to the fourth respondent and no relief of any restraint order as claimed by the petitioner in this behalf against the fourth respondent does merit any considerations. 66. This Board in Puneet Goel and Ors. v. Khelgaon Resorts Limited and Ors. (supra) categorically found that the respondents have not furnished any justification for the issue of further shares, whereas the impugned allotment of shares in the present case is already found to be for proper purpose of the Company. 67. The issue of further shares in favour of the fourth respondent herein was resorted to by the Company with an object of saving the existence of the Company, which is one of the essential requirements recognised in Gluco Series P. Ltd. and Ors. In re (supra). The Privy Council in the facts of Howard Smith Ltd. v. Ampol Petroleum (supra) was not satisfied that the company's financial affairs were at crisis point due to unavailability of capital or that there was a pressing need to obtain cash funds by a sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be issued, which are not satisfied in the present case. The accusation levelled against the petitioner's nominees that they never attended any board meeting over the last eight years cannot justify their removal under the guise of the provisions of Section 283(1)(g), without strict proof of their absenting themselves from three consecutive meetings of the board of directors of the Company, as envisaged therein, especially when the respondents never invoked Section 283(1)(g) of the Act at any earlier point of time during their absence for several of years. The fairness demands that the respondents ought to have cautioned before invoking the provisions of Section 283(1)(g), whereas they failed to conform to the probity, as laid by the Supreme Court in Kamal Kumar Dutta v. Ruby General Hospital Limited (supra). In view of this, the vacation of office of director by the petitioner's nominee directors is bad in law. Nevertheless, it should be borne in view that the petitioner now with meagre paid up capital, cash balance and least credit worthiness, has no employees, no assets, no trade marks, no needle business but merely engaged in the business of management, public re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do not venture to go into merits of the rival claims as regards violation of statutory and contractual violations, sought to be enforced by the petitioner. However, in view of the proposed severance of relationship by sale of shares by one group to another group, in terms of this order, and the disputed claims arising out of the collaboration arrangement, the parties may mutually explore the possibility of determining the outstanding amounts, if any, as a consequence of the alleged breach of the contractual obligations. 72. The petitioner has prayed for cancellation of the transfer of 1,37,163 equity shares of the Company effected in favour of the fourth respondent, yet no justifiable reasons for such cancellation are either pleaded save that the impugned transfer diluted the petitioner's shareholding and that the fourth respondent did not hold prior to the transfer, any shares, or substantiated. It is not the petitioner's case that the transfer of 1, 37, 163 equity shares in favour of the fourth respondent is violative of any of the articles of association of the Company. This prayer cannot also survive, in view of termination of the JVA by the petitioner, even prior t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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