Mr. M. Murali Krishna, Mr. M.K. ... vs Rdf Power Projects Limited, Mr. M. ... on 22 September, 2004
Equivalent citations: (2005) 4 CompLJ 119 CLB, 2005 57 SCL 112 CLB
Bench: K Balu
ORDER K.K. Balu, Member
1. This petition is filed under Sections 111A, 397 and 398 of the Companies Act, 1956 ("the Act") against M/s RDF Power Projects Limited ("the Company") and others alleging serious acts of oppression and mismanagement in the affairs of the Company and seeking the following reliefs: -
(i) to declare that the appointment of the second respondent as the Managing Director is null and void with consequential directions for refund of monies drawn towards remuneration and perquisites in favour of the Company;
(ii) to declare that the appointment of Mr. Karthik Maheswaram, Mr. Ramarao Pulugurtha, Mr. Sridhar Prasad Bikkina and Mr. Dayakar Thota as directors of the Company is null and void;
(iii) to set-aside the allotment of shares made in favour of the second respondent (1,00,000 shares), his wife M. Durga (50,000 shares), the third respondent (80,000 shares), his wife G. Anitha Reddy (50,000 shares) and the fourth respondent (40,000 shares) and direct the Company to rectify suitably the register of members;
(iv) to confirm that the Form No. 2 as stated at Para D-c of company petition is valid and effective;
(v) to appoint an independent auditor to ascertain the total amount siphoned off by the respondents 2-4 and surcharge them for such misappropriation of the Company's funds;
(vi) to audit the books of account and draft the balance sheet as at 31.03.1999; 31.03.2000 and 31.03.2001, afresh by an independent auditor appointed by the CLB;
(vii) to declare that the respondents 2 to 4 are responsible for violation of Sections 58A, 70, 94, 97, 165, 159, 166, 210, 224, 225, 285, 309 and other statutory violations of the Act; and
(viii) to work out a formula and mechanism for the disgruntled shareholders to exit the Company.
2. Shri Karthik Seshadri, learned Counsel appearing for the petitioners, while initiating his arguments submitted that the Company was incorporated on 11.12.1998 by among others the respondents 2 to 4 with main object of carrying on the business of generation of power out of Municipal solid waste. While the authorised capital of the Company is Rs. 50 lakhs consisting of 5,00,000 equity shares of Rs. 10/- each, the issued and paid-up capital of the Company is stated to be Rs. 56,07,000/-on account of the manipulations on the part of the respondents. The respondents 2 to 4 were the first directors and the third respondent was the first Chairman of the Company. The second respondent was appointed as the Managing Director with effect from 01.01.1999 for a period of five years, but on account of several of his irregularities, the second respondent was removed from the post of Managing Director on 29.12.2001, which is presently under challenge in a civil suit before the City Civil Court, Hyderabad. - The first petitioner became an additional director on 04.04.2000 and continued till 11.06.2000 and thereafter since 16.11.2001 he has been the director of the Company. At present the first petitioner is the Chairman and Managing Director of the Company. The second petitioner became an additional director on 09.04.2000 and continued till 11.06.2000 and thereafter became the director since 16.11.2001. The third petitioner became a director on 16.11.2001. The following are the charges against the respondents:-
The respondents have claimed a total investment of over Rs. 30 lakhs prior to incorporation of the Company, but only a sum of Rs. 38,000/-was approved by the Board of directors at its meeting on 12.12.1998, towards the pre-incorporation expenses as reflected in the original minutes produced at the time of hearing and the Form No. 20 filed with the Registrar of Companies on 29.12.1998, duly signed by the respondents. The entries in relation to the pre-incorporation expenses shown in the balance sheet of the Company for various years are merely book entries manipulated by the respondents. Moreover, copy of the minutes of Board of directors of the Company held on 12.12.1998 produced by the respondents (page 264 of vol.ii) showing the approval for pre-incorporation expenses of Rs. 13,38,000 is fabricated and cannot be relied upon without production of the original minutes of the said Board meeting. The respondents have not produced any other document establishing the pre-incorporation expenses, said to have been incurred by them. The allotment of shares in favour of the respondents are not supported by any consideration, but creation of fictitious book entries. No bank statement or any other material is produced evidencing payment of consideration for the shares allotted to the respondents. Shri Seshadri, in support of his claim placed reliance on the report of the Chartered Accountants appointed by this Bench, according to which the total investment of the respondents towards the share capital of the Company is only Rs. 3.38 lakhs. By virtue of the impugned allotments, the petitioners are reduced into minority shareholders, which would amount to an act of oppression as held P.K. Prathapan v. Dale and Carrington Investments Pvt. Ltd. - 2002 (111) CC 425.
When the second respondent was validly removed from the office of Managing Director at the Board meeting held on 29.12.2001, the second respondent and the Company filed a civil suit in O.S. No. 61/2002 on the file of City Civil Court, Hyderabad against the petitioners and the third respondent for a decree of permanent injunction restraining them from interfering with the management and functioning of the second respondent as the Managing Director of the Company save in accordance with law. The pending civil suit does not have any bearing on the issues raised in the company petition, especially when any action under Section 397/398 is a representative one and the CLB alone has jurisdiction to adjudicate the corporate rights of the shareholders sought to be enforced in the company petition and the reliefs claimed thereon can only be granted by the CLB.
When the second respondent was removed from the office of Managing Director and the civil court ordered to maintain status quo in the management of the Company, the second respondent hurriedly fabricated the balance sheets of the Company without adopting the prescribed procedure and filed the balance sheets for the financial years 1998-99, 1999-2000 and 2000-2001 on a single day, i.e. 19.04.2002. The balance sheets were not approved either by the members at the annual general meeting or by the directors in the Board meeting, as prescribed under the provisions of the Act.
Mrs. Durga, the second respondent's wife was never a director of the Company and her name did not find place in any of the Board meetings said to have been conducted by the respondents. The annual return of the Company for the year ended 31.03.2000 is found to be signed by the second respondent and his wife, when she was only a Company Secretary of the Company.
The petitioner group contributed an aggregate sum of Rs. 21 lakhs towards the share capital comprising of 2,10,000 shares of Rs. 10/-each which shall include 50,000 shares allotted in favour of the third petitioner and 20,000 shares to Shri K. Shashanka. Nevertheless, the allotment of 70,000 shares made on 21.07.2000 amounting to Rs. 7 lakhs as borne out by the receipts issued by the second respondent has not been included under the share capital of the Company in the balance sheet as at 31.03.2001, manipulated by the second respondent.
The second respondent had incurred huge expenses by way of land development charges, without acquiring any land; payment of interest; pre-incorporation expenses; annual maintenance charges, where there is only one buyer; salaries and wages, when there are no highly paid employees; traveling expenses, when there is no need; project expenditure, when the project is yet to the implemented; availed unsecured loan, when the business is not even started; conveyance expenses; office maintenance; donations; membership fees, miscellaneous expenses etc., and withdrew cash by self cheques running into lakhs of rupees, as borne by the balance sheet as at 31.03.2001. The second respondent overstated these expenses and misappropriated the difference amount, "causing prejudice to the interests of minority shareholders and the Company.
The second respondent never showed due diligence in complying with the statutory requirements and is responsible for the following statutory violations:
The Company had taken unsecured loans from its directors, without complying with the provisions of Section 58A and the Companies (Acceptance of Deposits) Rules, 1975.
While a sum of Rs. 38000/- is shown as the preliminary expenses by the respondents in the statement in lieu of prospectus delivered with the Registrar for registration on 29.12.1998, the balance sheet as at 31.03.1999 reflects Rs. 13,38,000/- by way of preliminary expenses, in contravention of Section 70 of the Act.
While the authorised capital of the Company is of Rs. 50,00,000 the second respondent had allotted shares and issued share certificates to the extent of Rs. 56,07,000, in excess of the authorised capital in contravention of Sections 94 and 97 of the Act.
The Company had neither convened and held the statutory meetings nor submitted the statutory reports with the Registrar of Companies in violation of Section 165 of the Act.
The Company had not convened and held the annual general meetings till the year 2001, an contravention of Section 166. The annual return, balance-sheet, and profit and loss account were not filed since incorporation till the year 2001 in violation of Sections 159 & 210 of the Act. The balance sheet as at 31.03.2001 does not reflect the true and correct picture of the share capital, omitting share capital of Rs. 7 lakhs contributed by the third petitioner and yet another shareholder.
The second respondent never convened any Board meeting in contravention of Section 285 of the Act.
The managerial remuneration of the directors and the Managing Director was made without complying with the requirements of Section 309 of the Act.
3. Shri T.L.N. Chari, learned Senior Counsel appearing for the respondents submitted as under:
The irregularities and illegalities levelled against the respondents pertain to the period since incorporation of the Company in December 1998 and further they are not continuing acts and therefore the company petition filed in May 2003 is barred by limitation.
The respondents were taking up the power project since the year 1994 and took the name availability of the Company and renewed the name from time to time till the Company was incorporated in December 1998, for which incurred huge expenditure to the tune of Rs. 13,38,000/- duly approved by the Board of Directors of the Company. As the bank account in the name of the Company was opened only after incorporation of the Company the amounts spent by the respondents prior to incorporation could not be accounted for in the bank account of the Company. Nevertheless, all the accounts were placed before the Board on incorporation of the Company and approved by the directors. By virtue of article 89, every account of the Company when audited and approved by an annual general meeting shall be conclusive. The petitioners are estopped from questioning the accounts duly approved by members at the annual general meeting held from time to time. The balance sheet for the year 31.03.2002 was duly approved by the Board of Directors including the petitioners 1 & 2. The shareholding of the respondents and the pre-incorporation expenses forming part of the balance sheet were duly approved by the petitioners 1 & 2. The petitioners 1 & 2 were the directors during the year 1999-2000 & 2001-2002 and the first petitioner was a director during the year 2000-2001, as borne out by the balance sheet for the respective years. Therefore, the petitioners are estopped from questioning the veracity of the statements and figures stated in the balance sheet for the year ended 31.03.2002.
The respondents 1 & 2 were constrained to file a civil suit in O.S. No. 61/2002 before the City Civil Court, Hyderabad against the illegal removal of the second respondent from the post of the Managing Director. The Civil City Court by an order dated 04.01.2002 made in IA Nos. 24-25/2002 directed that status-quo shall be maintained as on 04.01.2002 with regard to the management of the Company, which was ultimately upheld by the High Court of Andhra Pradesh. However, the petitioners are interfering with the management and the functioning of the second respondent as the Managing Director and therefore they are liable for contempt.
The petitioners have never pleaded before the civil court that the CLB alone has the jurisdiction to adjudicate the disputes between the parties. The order made by the High Court operates as res judicata and the CLB shall not further proceed with the company petition till the issues before the civil court are finally disposed of. Furthermore, the petitioners have failed to disclose particulars of the civil suit filed by the respondents in relation to the very same subject matter and thus they have not come with clean hands and the petition must be dismissed in limini.
An agreement dated 18.04.2001 came to be executed with one Panjalingam, representing a Malaysian firm, introduced by the petitioners 1 & 2 for transferring the entire equity of the Company. When Panjalingam failed to act in accordance with the agreement dated 18.04.2001, the petitioners had unlawfully removed the Company's books of account, financial vouchers signed by them, minutes book, blank signed share certificates, register of shareholders, Directors' attendance register, blank signed minutes sheets, computer floppies, files records etc. during the first week of January, 2002. Thereafter, the respondents had lodged a complaint with the police station, Panjagutta, which is pending before the Additional Metropolitan Sessions Court, Hyderabad. The respondents are not in a position to produce the books of account and the statutory records before the Company Law Board. The petitioners 1 & 2 had made use of the stolen signed minutes and the blank signed Form No. 32 to get themselves inducted into the Board by creating a fake resolution purported to have been passed at the Board meeting on 16.11.2001 and filed falsely Form No. 32. No Board meeting ever took place on 16.11.2001. Similarly, the petitioners fabricated different resolutions removing the second respondent from the post of Managing Director and shifting the registered office of the Company. There was no Board meeting held on 29.12.2001, wherein the Managing Director was said to be removed. The resolution purported to have been passed on 03.01.2002 shifting the registered office of the Company does not contain the Chairman's signature. The petitioners had again committed theft of the files, records, furniture, office equipments etc. in March 2003, kept at the registered office of the Company, upon which a police compliant was lodged on 07.03.2003 and the matter is before the Additional Metropolitan Session Court, Hyderabad. The criminal complaints lodged by the respondents are pending. The CLB is not to adjudicate the disputes between the parties, till the disposal of the criminal cases before the criminal court, especially when the relevant documents including minutes of the Board meeting, financial vouchers, books of accounts are not before the CLB.
The petitioners have shown the paid-up share capital of Rs. 56,07,000/- as on the date of the company petition. At the same time, the petitioners in their complaint dated 01.02.2002 made to the Registrar of Companies categorically reported that the paid-up capital of the Company is Rs. 54,71,000. The petitioners 1 & 2 while joining the Share Sale and Purchaser Agreement dated 18.04.2001 executed along with other directors in favour of M/s Indus Inova (M) SDN BHD had agreed to sell 5,20,700 fully paid-up shares of the Company. Thus, the petitioners have been taking different stand before the different authorities. Therefore, the paid-up share capital cannot be Rs. 56,07,000/-.
The third petitioner invested Rs. 7 lakhs towards the share capital, but later at his request he is shown as the sundry creditor, treating the said investment as a loan in the balance sheet for the year ended 31.03.2002. Furthermore, the third petitioner had stolen the signed blank share certificates and manipulated the issue of share certificates in his favour to the extent of 50,000 shares and another 20,000 shares in favour of his son, which are equivalent to the loan amount extended by the third petitioner. The petitioners have tiled Form No. 2 in regard to these allotments forging the signature of the third respondent.
The allotments in favour of the respondents are for valuable consideration and duly approved by the Board of directors. While the respondents are denying any statutory violation, the petitioners 1 & 2 are parties to the various financial expenses and the respondents are helpless in view of the fact that vouchers and the files containing the correspondence have been stolen away by the petitioners.
The original minutes of the Board meetings produced by the petitioners are stolen from the custody of the respondents and they have not come from proper persons and therefore no reliance can be placed on such documents.
4. Learned Counsel were given the liberty to file their written submissions by 22.03.2004, as sought by them. While written submissions on behalf of the petitioners were filed on 22.03.2004, the respondents did not choose to do so, in spite of the opportunities afforded to them. I have, therefore, considered the pleadings and arguments of learned Counsel. The main grievances of the petitioners are -
manipulation and fabrication of the shareholding of the second respondent and his group; .
manipulation and falsification of the balance sheet of the Company for the financial years 1998-1999; 1999-2000 and 2000-2001;
continuance of the second respondent as the Managing Director and other directors of the Company without approval of the Board of directors;
misappropriation of funds of the Company on account of land development charges, interest payment, annual maintenance expenses, travelling expenses, office rental, cash withdrawals from the bank account aggregating several lakhs of rupees; and contravention of many of the statutory provisions by the applicants.
6. Before going into the rival contentions of either of the parties, it shall be borne in mind that on an application filed by the Company and the second respondent (CA 37/2004) for stay of the company petition, under Section 10 of the Civil Procedure Code, 1908, until disposal of the civil suit in O.S. No. 61/2002 on the file of the City Civil Court, Hyderabad, in view of the commonality of the subject matter both in the company petition and the civil suit, this Bench, after affording an opportunity of being heard to the parties made an order dated 20.04.2004, the relevant portion which reads as under:
"A careful analysis of the issues both before the civil court and the CLB would indicate that the whole of the subject matter in these proceedings is not identical. Section 10 is not attracted if one or some of the issues are in common as held by the courts in a number of decisions. The entire subject matter of the company petition is not covered by the previously instituted suit. It is free from doubt that there is no substantial identity of the subject matter before the civil court and the Company Law Board. The only issue before the civil court is in regard to the right of the second applicant to continue in the office of the Managing Director of the Company. As a result the petitioners shall not interfere in the functioning of the Company. Thus, none of the other contentious issues raised, in the company petition is before the civil court. Therefore, the decision of the civil court will not definitely affect the decisions in the present company petition, save the continuance of the second, applicant as the Managing Director, in which case it cannot, be said that the matter in issue is directly and substantially is the same in both the proceedings. Section 10 would only apply, in my view, where the decision in the previous suit will definitely affect the decision in the later proceedings. Moreover, Sections 397 and 398 provide adequate relief to the aggrieved member on account of the possible oppression by the majority and a civil, court cannot usurp, the powers of a company court, whose jurisdiction brings from an enactment of Parliament and adjudge common law rights on a prior considerations, in support of which beneficial reference is drawn to V.M. Rao v. Rajeswari Ramakrishnan - 89 L.W. 243. A shareholder has two accounts of rights - individual rights and corporate rights. While every shareholder can enforce, his individual rights singly, corporate rights have to be enforced by the majority as held in Suresh Chandra Marwaha v. Lauls Private Limited -  48 CC 110. The relief of rectification of register of members of a company is not within the judicial competence of civil courts. It is far from doubt that the provisions of Section 10 of the CPC are mandatory as held by the Apex Court in Manoharlal Chopra v. Rai Bahadur Ray Raja Seth Hiralal (supra), if only the conditions of Section 10 are satisfied, which, as observed hereabove, are not duly met in the present case before us. For these reasons, there is no merit in the plea of the applicants that the proceedings before the CLB must he stayed until disposal of the civil suit filed by the applicants 1 & 2 must fail. Accordingly, the application is dismissed."
The respondents, aggrieved by the above order of this Bench, preferred an appeal in company appeal No. 2/2004 before the High Court of Andhra Pradesh, which now stands dismissed. Under these circumstances, continuance of the second respondent as the Managing Director would depend upon the final outcome of the civil suit in O.S. No. 61/2002 and the parties shall accordingly act. This does not warrant any interference of this Bench. I do not intend to adjudicate the dispute on continuance of the other directors, in the light of the reliefs ultimately proposed to be granted under the provisions of Sections 397 of the Act. The purported irregularities and statutory violations are such that their effects, if established, would amount to continuous acts of oppression and mismanagement in the affairs of the Company and therefore, the company petition cannot be hit by the law of limitation. The investment of the respondents 2, 3 & 4, investment of the spouse of the respondents 2 and 3 and the investment of the third petitioner and his son, after incorporation, towards equity share capital of the Company are under dispute. According to the respondents, they are not in a position to substantiate their investments, since substantial part of the investments was made prior to the incorporation of the Company and furthermore the petitioners had unlawfully removed the Company's books of account, minutes books, financial vouchers, blank signed share certificates, office files and several other assets in January, 2002 and March 2003, leading to the criminal complaints lodged by the respondents, which are pending before the Additional Metropolitan Sessions Court, Hyderabad. The petitioners are however denying any such theft of assets of the Company, which, according to them, is a rouse for disowning the liability by the respondents and denying the reliefs for the petitioners. Against this background, both the groups mutually agreed for verification of the books of account and other records of the Company ascertaining the quantum of investment made by them towards the share capital of the Company. Accordingly, M/s C. Ramakrishnan & Co., and M/s Anantham & Co., Chartered Accountants, were appointed, who on verification of the books of account and the relevant records submitted a report on 21.01.2004, perusal of which reveals, inter alia, the following essential aspects:
a) The pre-incorporation expenses of Rs. 13,38,000/- said to have been met out of the funds drawn from the second respondent's personal bank accounts (S.B. A/c No. 6774 with Canara Bank and S.B A/c No. 4629 with Indian Overseas Bank) are not supported by any documentary evidence except the audited balance sheets as on 31.03.1999 and 31.03.2000. The preliminary expenditure of only Rs. 38,000/- incurred by the second respondent stands properly explained. The allotment of 1,00,000 shares of Rs. 10/-made on, 30.06.2000 against the pre-incorporation expenses of Rs. 13,38,000/- and the balance of Rs. 3,38,000 under secured loan in the name of the second respondent are reflected in the balance sheet as at 31.03.2001. The statutory auditors have not made any qualification regarding the genuineness or otherwise of the pre-incorporation expenses.
b) The investment of Rs. 11,75,000/- claimed by the third respondent is reportedly made before the incorporation of the Company through the second respondent and not through the Company's bank account or cash account, partly viz., Rs. 50,000/- by cash and the remaining amount in three instalments by way of demand drafts on different dates. The amounts of the demand drafts are reflected in the bank statement of the second respondent, which are close to the dates of the demand drafts given by the third respondent.
c) The investment of Rs. 4,01,000/- claimed by the fourth respondent is purportedly made through the second respondent and not the Company's bank account or cash account prior to the incorporation of the Company. There is no material to show that the said amount of Rs. 4,01,000/- has been received by the Company towards the allotment of shares in favour of the fourth respondent.
d) The investment of Rs. 5,01,000/- by the second respondent's spouse made in cash through the second respondent towards the allotment of shares in her favour is not found to be received by the Company.
e) The investment of Rs. 5,00,000/- claimed by the third respondent's spouse is made by way of a demand draft in favour of Municipal Corporation of Hyderabad towards the allotment of shares in favour of the third respondent's spouse, genuineness of which is subject to confirmation from the Municipal Corporation.
f) The second petitioner made an investment of Rs. 10,00,000/- by way four cheques, out of which two cheques were drawn for Rs. 5,00,000/- in favour of the Company and the remaining two cheques for the balance of Rs. 5,00,000/- in favour of the second respondent receipt of which was acknowledged by the second respondent. However, there is no material showing deposit of the cheques given in favour of the second respondent into the Company's bank account or cash account. In this connection, it may be observed that the investment made by the petitioner group, save the third petitioner, towards share capital of the Company is not under dispute.
g) The third petitioner invested Rs. 7,00,000/- after the incorporation of the Company on different dates by way of cash and demand drafts towards allotment of 50000 shares in favour of the third petitioner and 20,000 shares in favour of his son. The third petitioner was issued share certificates bearing distinctive numbers 477001 to 527000. However, the third respondent, his spouse and the second respondent's spouse hold share certificates bearing the very same distinctive numbers 477101 to 487100; 477001 to 477100 and 487101 to 490700 respectively. The remaining distinctive numbers of the share certificates from 490701 to 52700 are not specified in the minutes of the Board meeting dated 31.07.2000. The third petitioner's son was issued share certificates with the distinctive numbers 527001 to 547000. The minutes of the Board meeting wherein the allotment of 50000 in favour of the third petitioner and 20000 shares in favour of his son are not on record. Having found that no books of account, records, bills, vouchers in support of the investments made towards the paid-up capital of the Company have been produced before the Chartered Accountants by either group, as reported in their report (para 3.1 at page 10) to arrive at any definite conclusion and the criminal complaints in relation to the alleged theft of the records of the Company are pending, I shall now turn towards the available documents on record for adjudication of this contentious issue. The petitioners are seeking to set aside the allotment of shares made in favour of the second respondent (1,00,000 shares). Durga, wife of the second respondent (50,000 shares), the third respondent (80,000 shares), Anitha Reddy, wife of the third respondent (50,000 shares) and the fourth respondent (40,000 shares), for want of any valid consideration. The petitioners while complaining before the Registrar of Companies, Hyderabad against the second respondent by their letter dated 01.02.2002 (page 47-70 of company petition) categorically reported that the shares issued in favour of the second respondent and his wife are not supported by any valid consideration. In this connection, the relevant recitals forming part of the complaint dated 01.02.2002 assuming importance reads as under: -
"Sri.M. Venkateswarlu has shown allotment of 1,50,200 number of shares to himself and his wife and the amount involved in this regard is Rs. 15,02,000. On a general verification of the bank statement we found that no amount was credited to the Company's bank account from the above allottees and we believe that this receipt of money by the Company from Sri.M. Venkateswarlu is a malafide and cooked up transactions to build his capital."
The complaint of the petitioners before the ROC on the issue of the allotment of shares is that on a general verification of the bank statement, it was found that no amount was credited to the Company's account from the second respondent and his wife towards allotment, of shares in their favour. It shall be borne in mind that the preliminary and the pre-incorporation expenses incurred by any promoter could never be reflected in the Company's bank account for the simple reason that no bank account could be opened in the name of the Company before its incorporation. In the present case, the specific plea of the respondents is that they had incurred expenses prior to the incorporation of the Company, the quantum of which is under dispute. The petitioners have nowhere contended in the complaint before the ROC that the allotment of shares made in favour of the other respondents and the spouse of the third respondent are not supported by any valid consideration. The petitioners have neither expressed any grievance in regard to the shares held by "the other respondents. It is further observed that the petitioners 1 & 3 specifically contended in their written statement filed in O.S.No. 61/2002 on the file of the City Civil Court, Hyderabad that the second respondent has "not invested any amount except 100 shares which he had originally taken at the time of incorporation of the Company." The petitioners have never challenged the allotment of shares in favour of any other respondent as not supported by consideration. There is an agreement dated 18.04.2001 on record entered into between the Board of directors and shareholders of the Company (Vendors) and M/s Indus Inova (M) SDN BHD (Purchaser), a company incorporated under the Malasyian Companies Act, 1965 for sale of the entire issued share capital of the Company consisting of 5,20,700 equity shares of Rs. 10/- each. The relevant clauses of the agreement are reproduced herebelow:-
"(6) The Vendors are the registered and beneficial owners of 100% of the issued share capital of the company.
(7) The Vendors have offered to sell to the Purchaser and the Purchaser is interested in purchasing all the Shares from the Vendor.
(8) Accordingly, the Vendors and the Purchaser have agreed to do all things necessary to put into effect the sale and purchase of the Safe Shares on the terms and subject to the conditions set out hereinafter."
It is clear that the petitioners 1 & 2 and the respondents 2 to 4 are parties to the agreement. The categorical statement is that the vendors, viz., the petitioners 1 & 2 and the respondents 2 to 4 are the registered and beneficial owners of the entire issued share capital of the Company. The vendors have offered to sell all their 5,20,700 shares in favour of the purchaser. The petitioners 1 & 2 having joined the agreement dated 18.04.2001, in my view, have confirmed that the shares allotted in favour of the respondents, being the subject matter of the agreement dated 18.04.2001 are supported by consideration. If the shares allotted in favour of the respondents are not supported by consideration, then the question of the petitioners 1 & 2 joining the agreement along with the second respondent for sale of 100 per cent of the issued share capital does arise. The balance sheets for the years 1998-1999, 1999-2000, 2000-2001, being disputed by the petitioners are ignored. Nevertheless, the balance sheet for the year 2001-2002 signed only by the petitioners 1 & 2 reveals the following shareholding pattern in the Company: -
|G. Ravikumar Reddy
|G. Anitha Reddy
|Dr.(Lt. Col) ar Thota
|M. Phani Pawan
|M. Sri Sudha
|Prof. K. Rejeshwar Rao
The balance sheet for the year 2001-2002 further reveals the unsecured loans in the name of the third petitioner and the second respondent to the tune of Rs. 7,00,000 and Rs. 3,41,773 respectively. The Schedule 7, forming part of the balance sheet for the year ended 31.03.2002 reflects among other things bank charges, business promotion expenses (Rs. 3,58,000), conveyance expenses (Rs. 2,11,584), hire charges (car) (Rs. 2,81,137), land development charges (Rs. 3,95,500), miscellaneous expenses (Rs. 2,45,034), office rent (Rs. 2,77,000), per-incorporation expenses (Rs. 13,38,500), salaries and wages (Rs. 15,59,197), travelling expenses (5,30,270). Article 89 specifies that every account of the Company, when audited and approved by an annual general meeting, shall be conclusive. The accounts of the Company are admittedly audited and the petitioners 1 & 2, being a party to the approval and adoption of accounts for the year ended 2001-2002, they are estopped from questioning the shareholding of the members including the respondents and the unsecured loans, miscellaneous expenses etc. forming part of the balance sheet for the year 2001-2002. However, these expenses would be of little significance, keeping in view of the reliefs proposed by this Bench. It is further observed that the third petitioner is shown as an unsecured creditor and not as a shareholder. There are discrepancies in the share certificates held by the third petitioner in regard to the distinctive numbers. The minutes of the Board meeting dated 21.07.2000, wherein the shares were purportedly allotted in favour of the third petitioner and his son are not before this Bench. The petitioners 1 & 2 do not offer any explanation as to why the third petitioner is shown as an unsecured creditor and also as to why the shareholding of the respondents is shown as reflected in the balance sheet of the Company for the year 2001-2002, especially when the petitioners 1 & 2 are parties to this balance sheet. In view of the foregoing conclusions and in exercise of the powers of the CLB under Section 402, the following order is passed:-
It is hereby declared that the entire paid-up share capital of the Company is held by the members belonging to the petitioner group and the respondent group as reflected in the balance sheet for the year 2001-2002;
The Company shall refund to the third petitioner the sum of Rs. 7,00,000, reflected under the head of unsecured loans in the balance sheet for the year 2001-2002 against him with simple interest at 10 per cent per annum from the date of receipt till the date of repayment in favour of the third petitioner. The share certificates held by the third petitioner and K. Shashanka in respect of 70,000 shares shall stand cancelled.
All the expenses and liabilities reflected in the balance sheet for the year 2001-2002 are binding on the Company.
The Company and its officers in default are liable for statutory violations, if any, for which the Statutory Authority is at liberty to initiate appropriate action in accordance with law.
In view of the irreconcilable differences and the animosity between the petitioners and the respondents as borne out by the civil suit and the various criminal proceedings initiated against each other, I am of the opinion that the Company cannot run smoothly with the coexistence of both the parties. The only way to ensure the smooth functioning of the Company is that the warring parties must part way by the exit of one group from the management of the Company, which is one of the prayers made by the petitioners. Admittedly, while the respondents are the promoters, the petitioners are the investors and the Company is yet to commence the power plant generating electricity. In view of this, the petitioner group will transfer their shares, viz., the first petitioner (1,00,000); second petitioner (10,000); M. Phani Pawan (10,000); M. Sri Sudha (5,000); M. Haika (5,000); and M. Kallemullah (10,000) in favour of the respondents, on receipt of the amount of investment of Rs. 14 lakhs made by them together with simple interest at 10% per annum from the date of investment till the date of repayment by the respondents, upon which, the petitioner group shall deliver the original share certificates together with the blank share transfer forms in favour of the respondents. The whole process shall be completed within 60 days of receipt of the order by the parties.
Though the company petition has been finally heard on 14.07.2004, the same could now only be disposed of in these lines, after dismissal of the appeal in company appeal No. 2/2004 on the file of High Court of Andhra Pradesh preferred by the respondents. No order as to costs.