9911796707
TMI Blog2006 (9) TMI 629X X X X Extracts X X X X X X X X Extracts X X X X ..... thers and other family members held 58% shares in the company. In the year 2000, the petitioners' group acquired the shares held by other family members and thus held the entire 58%.. There are 3 groups in the company, namely, Galhotra group (the petitioners), Verma group (the second respondent) and Khajinder Singh group ( the third respondent). The latter two groups held the balance 42% of the equity shares at 21% each. Even though the petitioners group was in majority with 58% shares after acquisition of shares from other family members, with the view to give equal representation on the board for all the three groups, in a Board meeting on 6.8.2001, the 1st petitioner proposed that the quorum for the board meetings should be 3 directors, one from each group and the Board resolved to accept the said suggestion. After the petitioners acquired the shares, in 2001, it was agreed and decided by the three groups that for the smooth running of the hotel, the shareholding should be equalized and the hotel should be run in the nature of a quasi partnership among the three groups. Accordingly, the 1st petitioner voluntarily transferred nearly 25% of the shares held by his group to othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner sought for postponement of the meeting as he was not available on 31.10.2005. It had come to the knowledge of the petitioners that in the Board meeting on 14.10.2005, the 1st petitioner had been removed as the MD and the second petitioner had also been removed as the GM. No business could have been transacted in the meeting as due to exchange of words, the petitioners had left the meeting and in view of the fact that, without the participation of the 1st petitioner there would have been no quorum, even if the other directors had passed resolutions to remove the 1st petitioner as MD and the second petitioner as GM, the same would be invalid. With the removal of the 2nd petitioner as the general manager and the 1st petitioner as MD, the respondents have high jacked the management of the company completely in exclusion of the petitioners holding 1/3rd shares in the company. Having removed the 1st petitioner as MD, with the view to further consolidate their control over the company, the respondents have also caused a special notice dated 31.10.2005 to be issued by their group under Section 190 of the Act for the removal of the 1st petitioner as a director in the AGM. After the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties to the present proceedings. In 1979, the petitioners' group consisting of 3 brothers became shareholders of the company. Verma group entered the company in 1980 with 21% shares and Singh group became shareholders in 1982 with 21% shares. Thus, when the hotel business was commenced in the year 1982, these two groups held 42% while the 1st petitioner by himself held only 17% shares. There were some disputes among the brothers in the petitioners' group and by way of a settlement in 2001, with the financial assistance given by Varma and Singh groups, the 1st petitioner acquired the shares held by other family members, and thus, came to hold 58% shares. Because Varma and Singh groups funded the purchase of these shares by the petitioner's group, they transferred 25% shares to the Varma and Singh groups by which each group came to hold 1/3rd shares in the company. Petitioners' prayer in the petition that the transfer of shares approved in the meeting held on 13.8.2001 should be declared as null and void cannot be granted not only as being time barred but also because it was a voluntary transfer. The petitioners' reliance on two Board meetings held on 6.8.2001 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te to the company seeking for various clarifications. Finally, the 1st petitioner caused a legal notice dated 1.10.2005 once again making similar allegations against the respondents. The company convened a Board meeting on 14.10.2005 to discuss the issues raised by the petitioner and the 1st petitioner attended this meeting, and the majority of the board decided to remove him. as MD and appoint the 3rd respondent as the MD. As far as the proposal to remove the 1st petitioner as a director is concerned, in law, the majority shareholders have the right to remove a director and since the 1st petitioner has acted against the interests of the company. The allegation of the petitioners that the funds of the company are being siphoned of due to which the profitability has come down is not correct. Because of competition from many new hotels that have come up in Amritsar, the company has to renovate the hotel incurring substantial expenses. It is to the knowledge of the petitioners that there is an internal auditor in the company who has been monitoring the expenses on a day to day basis. It is on record that the company has earned a profit of Rs. 1.6 crores on a paid up capital of Rs. 50 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s given to each partner so that two do not join against the third. In the same way, the 2nd petitioner was appointed as the General Manager of the company. In the board meeting held on 13.8.2001, it was the 1st petitioner who suggested that there should be a rotation of MD every two years and the Board approved the suggestion and accordingly on that basis, the 3rd respondent was appointed as MD for two years. Therefore, to contend that it was only a suggestion and not approved is not correct. In the same meeting, the 1st petitioner was appointed as the Joint MD. The very fact that after expiry of two years, the 2nd respondent was appointed as MD on 14.8.2003 and that further after expiry of two years, the 1st petitioner was appointed as MD on 7.9.2005 would indicate that the rotation of MD had been formalized and agreed to by all the three groups. Therefore, the 1st petitioner has the legitimate expectation of continuing as MD for a period of two years and as such cannot be removed. When the 1st petitioner became the MD and on finding out that there had been financial mismanagement and siphoning of funds during the earlier years, he only sought for clarifications which were never p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d may assume significance and in such an event, the principles of quasi partnership in a given case may be invoked. Thus, it is evident whether the quasi partnership principles can be applied or not would depend on the facts of each case. It is an admitted position that in the present case, there are only three groups in the company holding equal percentage of shares. Whether the petitioners' group transferred a part of its shares to the other two groups voluntarily so as to maintain equality in the shareholding or as contended by the respondents, the shares were transferred against the financial assistance given by them to the 1st petitioner to acquire the shares from his other family members is, difficult to decide in the absence of more particulars, but the admitted fact is that the transfer resulted in all the three groups having equal percentage of shares in the company. It is also an admitted fact that after the three groups became equal shareholders in 2001, all the three groups were associated in the management either as MD or Joint MD. If a company has equal shareholders and if all of them participate in the management, the concept of quasi partnership can always be pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... following resolution was passed Resolved unanimously that S. Khajinder Singh is being and hereby appointed as MD of the co. with immediate effect for a period of two years from the date hereof . From this, it is abundantly evident, that the Board had actually resolved to appoint an MD from each group for a period for two years, and the resolution was immediately acted upon also by appointing Shri Khajinder Singh as MD for two years term. The appointment of Shri Rakesh Verma as MD in the board meeting held on 14.8.2003 after completion of 2 years term by Shri Singh and further appointment of the 1st petitioner as MD on 7.9.2005, after completion of two years term by Shri Verma would confirm that the board had actually implemented the decision already taken. Therefore, the contention of the respondents that in the board meeting held on 30.1.2001, only a proposal was considered but no decision was taken is not correct. Breach of a decision collectively taken by all the partners in a quasi partnership and which has been acted upon also could definitely be termed as an act of oppression. The contention of the respondents that the Articles of the company have not been amended in line wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oppression. Some of the cases wherein this Board has taken a similar view are Gurnam Singh v. Polymer Papers Ltd. 123 CC 486, Arati Dutta v. Unit Construction Ltd. 124 CC 584. Therefore, the removal of the 1st petitioner as MD besides being highly oppressive in terms of section 397, is also invalid. Removal of a director that too of the MD, as held by the Supreme Court in Ruby General Hospital case, would attract the provisions of section 398 also. 9. Both the petitioners and the respondents have alleged that the other group is either entertaining its friends and relations free of cost or that collections have not been deposited in the company. It is to be noted that company is a closely held company and out of necessity to maintain cordial relationship with those connected with the management, the provision of hospitality is unavoidable and it is quite possible that this practice must have been going for a long. Therefore the allegations and counter allegations in this regard do not merit giving any finding. I am of the view that 1st petitioner by writing the letters seeking for explanations from the respondents on the issue, need not have blown up the issue out of proportion resu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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