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TMI Blog2014 (9) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... ts and Polishes etc. under the brand name "Waxpol". The company is also engaged in the business of Tourism and Hospitality Sector and operates one resort in Jalpaiguri area of the State of West Bengal. ii) The company was originally incorporated as Public Company limited by shares by two brothers, namely, the father of petitioner No. 1, i.e., Late Paramanand Garg and father of respondent No. 2, i.e., Late Purnanand Garg. Both of them were original promoters of the said company and signatories to the Memorandum of Association. iii) The respondent company was incorporated to take over the existing business of a partnership firm, namely, Glamor Polish Industries (abbreviated as G.P.I.) which was a partnership between Shri S.C. Agarwal and Late Purnanand Garg (father of R-2). The father of petitioner No. 1 contributed to the capital of the said firm and also lent and advanced moneys to G.P.I. After the business of G.P.I. was taken over by the respondent company, the loan given by father of petitioner No. 1 was converted to equity in the said company. At all material times, both the branches of the Garg family treated the company as a partnership on 50:50 basis between the two branc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the applications filed by the petitioners and preferential allotment of shares to respondent No. 2, the shareholding of the petitioners was reduced from 33% to 22% and the shareholding of the respondent No. 2 and his group increased from 33% to 49%. On being asked about the wrongful rejection of the share application of the petitioner No. 1, the respondent No. 2 assured the petitioner No. 1 that 50:50 partnership between the two branches of the family would continue notwithstanding the present composition of shareholdings in the respondent company. The petitioners have challenged the impugned allotment of shares on the ground that the applications of the petitioners were rejected on flimsy grounds by respondent No. 2 with a malafide intention to wrongfully increase the shareholdings of the respondents and reduce the shareholding of the petitioners. It has been also submitted that the company was in no need of funds and such allotment was a device to reduce the shareholdings of the petitioners into a minority. viii) In or about 2003, petitioner No. 1 was removed from Whole Time Director of the said company when he was at 49 years of age. Till 2003, petitioner No. 1 had devoted hi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oGM was given to the petitioners and no such meetings were ever held. c) The allotment of impugned shares to the respondent group is wrongful and illegal and has been made with the sinister object of converting the petitioners into hopeless minority and to wrongfully and illegally wrest control of the assets of the company in favour of the respondents. d) The allotments of shares have been made at a price of Rs. 15/- per share. The price of such issue of shares has been arrived at as per audited Balance Sheet for Financial Year 2007-08. The value of the company with turnover of Rs. 46.00 Crores and net profit of Rs. 42.5 Lakhs has been arrived at Rs. 46.00 Lakhs by the respondents for their own benefit. Further, the shares have been issued at Rs. 15/- per share when the profit per share is Rs. 13.77 and price to earning (PE) ratio is 1.08 times. As a result of this issue, the net worth of the company has increased by mere 6.8%, even though share capital has expanded by 130%. e) As per Board meeting dated 21st August, 2009, in which the impugned shares were allotted, the audited Balance Sheet and Profit & Loss Account for the financial year 2008-09 was approved by the Board. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed from WIL. The net profit of WHRL was Rs. 1,44 lakhs which yields a net profit margin of 55%. The Profit & Loss Account of WHRL shows no expense items, like, rent or salaries, because all these expenses have been charged to WIL. In the same year, Hotel & Resort Division of WIL has shown a net loss of Rs. 26.32 lakhs. xiii) Sundarban Tiger Camp (STC) is a wild safari resort situated at 24-Parganas, Dayapur, Post-Gosaba (South). Respondent No. 2 is the sole proprietor of the said resort and the equipments like vehicles, furniture and fixture, Wind Mill etc. have been diverted from WIL and the employees working in STC are in pay roll of WIL. STC operates from the registered office of WIL and the largest customer of STC is WIL also. Respondent No. 2 is diverting the business of R-1 Company to his own proprietorship firm which is prejudicial to the interest of the respondent company. xiv) The Research and Development Laboratory of the respondent company has been shown to be situated at 62, Jatin Das Road, Kolkata 700 029 being the residence of respondent No. 2. All the household expenditure of respondent No. 2, like, electricity, generator, telephones, repairs, entertainment, staf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany or companies carrying on or engaged in, or about to carry on or engage in, or being authorized to carry on or engaged in, any or all business or transaction which this Company is authorized to carry on or engage in or any business or transactions capable of being conducted so as directly or indirectly to benefit this Company either in this Country or in a Foreign Country and to subscribe into the capital of the said entities and otherwise invest the funds of the company in accordance with laws. (b) To take or otherwise acquire and hold shares in any other company or Companies having objects altogether or in part similar to those of this company or carrying on any business capable of being conducted so as directly or indirectly to benefit this Company either in this Country or in a Foreign Country." (2) To consider and if thought fit to pass, with or without modifications, the following resolution as a Special Resolution:-- "RESOLVED that pursuant to the provisions of Section 81(1A) and other applicable provisions, if any, of the Companies Act, 1956 ("the Act") and the provisions of the Unlisted Public Companies (Preferential Allotment) Rules, 2003 ("the Rules") and in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o do all such things as may be expedient, necessary and lawful in this regard." (4) To consider and if thought fit to pass, with or without modifications, the following resolution as a Special Resolution: "RESOLVED that approval be and is hereby accorded pursuant to Section 149(2A) of the Companies Act, 1956, to the company to commence as and when its Board of Directors may think fit the business specified in the proposed sub-clause 4 of its Main Object of the Memorandum of Association, as altered." xix) According to the petitioners, if the aforesaid resolutions are passed, a new partner would be inducted into the company which is already in the nature of a quasi partnership without taking his consent and will change the shareholding of the company for which the petitioners are not agreeable. Further, the proposed resolutions are in violation of the family understanding in relation to the company and if allowed, would cause loss to the petitioners. There is no need to form a joint venture company in Sri Lanka as the company itself is capable enough to provide the business and thus, the proposed resolutions are nothing but a device to defraud the company by siphoning away its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set out in the explanatory statement dated 4th May, 2011 in relation to EoGM dated 31st May, 2011, has been that it is by way of gift to the shareholders. However, no new funds would come to the company as a result of issuance of such bonus shares. Further, on the basis of the order of the Hon'ble High Court at Calcutta dated 6th April, 2011 (Ref: Annexure-B to C.A. No. 176 of 2011, Pages 31-33). It has been clearly stated that no rights are to be claimed on the basis of allotment of 2011. As such, the bonus issue could not have been made and accordingly such issue, if made, is liable to be cancelled, because it really has served no purpose towards the benefit of the company." 3. As against the above averments of the petitioners, the respondents have made following submissions as per various affidavits drawn as available on record:-- "(i) The petitioners do not have the requisite shareholding to lodge the petition because the concerned letters obtained by them from some of the shareholders are vitiated as the said letters were obtained much prior to the initiation of the proceedings. To be specific, even though the company petition has challenged events, the cause of which a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... no common cause of action between the petitioners so that they can claim any right to the management or affairs of the company. The complaints of the petitioners are necessarily barred by the principle of acquiescence and delay as they sought to bring in events, which took place long back. The name of petitioner No. 3 is not in the register of members of the company. The alleged purchase of shares by petitioner No. 1 and petitioner No. 3 on 29th October, 2010 and 30th November, 2010, was only done for the purpose of filing of the instant petition. If the petitioners were aggrieved by any genuine acts of mismanagement and operation in the hands of the respondents, they would not have bought further shares in the company. (vi) The company petition has been initiated at the behest of local competitors of the company in the business of manufacturing Polishes. One ex-employee, namely, Mr. Tiwari residing in Ranchi has started his business of manufacturing polishes under the name and style of "Glowax Industries". Petitioner No. 1 also stays in Ranchi. The litigation is being financed by the competitor as he wants to take over the polish business of the company through the petitioners. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of such notice of EoGM dated 07.03.2009 (Ref: Pages 31-50 of reply to supplementary affidavit annexed and marked "W-33"). The consenting shareholders who have issued consent letters have nowhere mentioned that these shareholders have not received notice of EoGM dated 07.08.2009. The letter of Postal Department dated 16.06.2011, is per report of Dharmatala business office, indicating that no article as mentioned by the company was posted on 15th July, 2009, has been procured by petitioners will be evident from the following facts:-- "(a) The said letter was in reply to a letter dated 12.05.2011 by the Advocate of petitioners. (b) Under Right to Information Act, the Postal department has confirmed by letter dated 25.08.2011 (Ref: Pg.24 of reply to supplementary affidavit annexed and marked as "W-36") and letter dated 06.09.2011 (Ref: Pg. 26 of reply to SA annexed and marked as "W-37") that no record is maintained in post offices in respect of "Under Certificate of Posting". Therefore, petitioners could not have obtained any letters from Dharmatala Post office that no articles were posted by company on 15.07.2009 under UCP. (c) The letter dated 16.06.2011 was obtained by petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment of shares and never protested against the same. In addition, petitioner No. 1 and petitioner No. 3 have also bought shares in the company in 2010, which is an act of waiver on the part of the petitioners. (xi) As regards 2011 allotment, it has been contended that allotment was made after complying with the provisions of the Companies Act, 1956. Admittedly, notices dated 24.12.2010 for convening of EoGM dated 23.03.2011 were received by petitioner No. 1 and petitioner No. 2 and the explanatory statement was sent along with such notice. Special Resolution under Section 81(1A) of the Companies Act, 1956 was adopted in EoGM held on 23.03.2011 and the minutes have been annexed at Page 126 of reply to C.P. annexed and marked as "W-60" which will show that special resolution was passed unanimously. Petitioner No. 1 and petitioner No. 2, in spite of receipt of notice, did not attend such EoGM and did not oppose the passing of resolution. Petitioner No. 1 and petitioner No. 2 are therefore, estopped from challenging the preferential allotment. (xii) At the time of the issue of notice, the business in Sri Lanka was a proposed business and the company was in the process of identifyin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "W-68" and at pages 113-114 of reply to CP annexed and marked as "W-69" which shows the approval letter dated 03.05.2009 of HDFC Bank along with repayment schedule to HDFC Bank. (xv) It has been alleged by the petitioners that Waxpol Hotel and Resorts Limited (WHRL) is using the infrastructure of the company and the business of the company has been diverted to WHRL. In this regard, it has been submitted that the allegation is baseless as WHRL is marketing the company's resort located at Jalpaiguri in respect of which WHRL is earning a commission from the respondent company. In course of such marketing the property of the company, question does not arise of any diversion of business of the company to WHRL, more so because WHRL has no hotel or resort of its own and thus, there is no conflict of interest. (xvi) As against the allegation of the petitioners regarding the proprietary business of respondent No. 2 in the name of Sundarban Tiger Camp (STC), it has been contended that the said property does not belong to the respondent company and therefore, it does not make any concern for the petitioners. (xvii) On the issue of bonus shares, it has been contended that such share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... constitute 50% of the total shareholding as per the claim of the petitioners. The respondent company was incorporated in 1950 by taking over the existing business of the partnership firm, namely, Glamor Polish Industries (GPI) which was a partnership between Shri S.C. Agarwal and Late Purnanand Garg (father of respondent No. 2). The father of petitioner No. 1 contributed partly towards the capital of the said firm and loan given by father of petitioner No. 1 was subsequently converted to equity in the said company. Thus, the original partnership for running Glamor Polish Industries (GPI) which was subsequently taken over by the respondent company was not set up by joint participation of Late father of petitioner No. 1 and Late father of respondent No. 2. Further, the father of petitioner No. 1 became director in the company only on 14.10.1958, while the company was established in 1950. No further evidence has been brought on record by the petitioners to justify setting of the company jointly by the Late father of petitioner No. 1 and Late father of respondent No. 2. Therefore, the contentions of the petitioners that the company has been run on quasi-partnership principle having equ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he parties acting as a group and equal partnership. However, before rendering any opinion, it will be worthwhile to consider other aspects canvassed before the Board. 7. The petitioners have challenged the impugned allotment of shares. In 1995 on the ground that the sole purpose of such allotment was to take away the negative control of the petitioners group. However, the petitioners could not defend their case of rejection of application for allotment of shares which was defective on the ground of such application being made on joint shareholding without mentioning PAN number of the applicant which was a mandatory requirement for filing such application. As regards the loss of negative control of the petitioners group, reliance has been placed in the case of Clemens v. Clemens Bros. Ltd. & Anr. [(1976) 2 All ER. 268]. However, in 1995, petitioner No. 1 and petitioner No. 2 held 10.14% and 6.96% of the then issued, subscribed and paid up capital of the company. Therefore, there is no loss of negative control of the petitioners group as a result of impugned allotment. The case of Clemens is distinguishable because in that case, there were only two shareholders and a closely held fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tial allotment of 4,00,000 equity shares ofRs. 10/- each in consequence of an EoGM dated 21.08.2009 for cash at a premium of Rs. 5/- per share. Petitioner No. 3 was not a shareholder during that period and therefore, petitioner No. 3 cannot complain of 2009 allotment. The aforesaid allotment was done in compliance of the provisions of Section 81(1A) of the Companies Act, 1956. The notice of EoGM in relation to the allotment of shares was stated to be sent to the petitioners under Certificate of Posting. The proof of despatch of notice has been annexed at pages 103-104 of reply to C.P. A number of shareholders have confirmed receipt of such notices of EoGM dated 07.08.2009 as evident from pages 32-50 of reply to supplementary affidavit dated 8th November, 2011. The petitioners have relied on the letter of Postal department dated 16.06.2011, wherein it has been intimated by Dharmatala business office of the Postal department that no articles as per the enclosed chart were posted by the respondent company on 15.07.2009 under UCP. On the other hand, as per reply against information sought under RTI Act, 2005 by the respondent company, the Postal department vide its letter dated 06.09.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case. Further, in respect of Sindri Iron case, the respondents sought to distinguish it by submitting that notices of 1995 allotment as also that of 2011 EoGM were issued through UCP and were duly received by petitioner No. 1 and thus, there is no plausible reason available to the petitioner to contend that notice was not received in 2009. Further emphasis has been placed by the respondents on the fact that majority of other shareholders have received such notices under UCP and had attended the meetings. 10. The aforesaid allotment of 2009 has also been impugned by the petitioners on the ground that allotment of shares to majority group themselves is oppressive by placing reliance on Shanti Prasad Jain v. Kalinga Tubes Ltd. [AIR (1965) SC 1535]. This judgement has been sought to be distinguished by the respondents on the ground that in the said case, the petition was dismissed. However, in the instant case, there is no lack of probity in allotting shares to the respondent group as the petitioners have not participated in the affairs of the company and consolidation of shares by the majority will not be oppressive because it is to ensure that the company gets managed proper ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guish the above cases cited by the petitioners and submitted that sufficient information was given about Sri Lankan partner and the petitioners after receipt of notices never sought any clarifications which tantamount to indifference towards the affairs of the company. The details of business partner are commercial secrets that need to be kept in perspective since the respondents were only trying to find the suitable partner. The respondents have already filed the details of such partners along with reply and therefore, according to the respondents, no further cause of action lies in the matter. Since the business by way of joint venture with Sri Lankan partner has not fructified finally, the challenges made by the petitioners In this regard have lost its meaning and therefore, no further interference is called for on this issue. 14. The petitioners have challenged the valuation of shares arrived at by the company. According to the respondents, such valuation was undertaken by its statutory auditors based on accepted principles of valuation. It has been submitted that petitioners have given four different kinds of valuation where the shares of the respondent company have been valu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... khs when the average profit of the company was Rs. 35.06 lakhs per year, the necessary explanation has been provided by the respondents as recorded in para 3 (xxiv) of this order and I find no irregularity or defect in acquiring such BMW car for official use in running the business affairs of the company and there has been no financial impropriety or lack of probity in such acquisition of car resulting in alleged mismanagement of the company. 18. It has been alleged by the petitioners recorded at para 2(xii) of this order that the tourism business of the respondent company is diverted to WHRL, a company controlled by respondent No. 2 and his family members causing loss to the respondent company. However, it has been submitted by the respondents that WHRL is marketing the company's resort located at Jalpaiguri for which WHRL is earning commission from the respondent company. Thus, there is no question of diversion of business of respondent company to WHRL. I do not find any merits in the allegations of the petitioners because WHRL does not own any hotel or resort in its name and therefore, question of diversion of any business of respondent company does not arise. WHRL is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 2 have been charged towards maintaining R&D Laboratory of the respondent company located at the residence of respondent No. 2 and if so, quantification of such expenses to be made. (iii) Whether the educational expenses of the sons of respondent No. 2 have been sponsored and financed by respondent company and if so, the resolutions of Board Meetings to be seen in this regard and otherwise, total of such expenses to be quantified. After quantification of the aforesaid expenses, if respondent No. 2 fails to offer any reply towards justification of incurring of such expenses in the hand of the respondent company, respondent No. 2 is hereby directed to refund such inadmissible expenses to the till of the respondent company and the auditor shall pass necessary accounting entries in the books of accounts of the respondent company on the strength of this order. 23. The respondents filed CA No. 177 of 2011 highlighting various instances of false and incorrect statements made by the petitioners deliberately for which no plausible explanations could be offered in the reply affidavit of the petitioners. The petition was claimed to be filed with support of some consenting shareholders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h transfer deeds duly signed for further necessary action in accordance with law. 27. The valuer will furnish the valuation report to the petitioners and respondents including respondent company and the Bench Officer attached to this Bench and submit the bills against such valuation within 7 days of completion of valuation report to the respondent company and after verification of the same, the respondent company will release the payment to the valuer. 28. After carrying out the mutual obligations cast on the petitioners and respondents as per this order, an affidavit of compliance shall be drawn by both the parties within 7 days of such compliance and the same should be produced before the Bench Officer for taking the same on record. The statutory auditor, after complying with the directions contained in this order, shall draw an affidavit to the said effect and furnish the same to the Bench Officer within 7 days of such compliance for keeping the same on record also. 29. In compliance to the order of Hon'ble High Court of Calcutta dated 6th April, 2011 (APOT No. 134 of 2011, ACO No. 37 of 2011), the question of undervaluation of shares has been looked into and it is decide ..... X X X X Extracts X X X X X X X X Extracts X X X X
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