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Shri Dinesh Sharma And Smt. Bina ... vs Vardaan Agrotech Pvt. Ltd. And ... on 29 August, 2006

Company Law Board

Shri Dinesh Sharma And Smt. Bina ... vs Vardaan Agrotech Pvt. Ltd. And ... on 29 August, 2006

Equivalent citations: 2007 135 CompCas 133 CLB, (2007) 1 CompLJ 155 CLB

Bench: V Yadav

ORDER Vimla Yadav, Member

1. In this order I am considering Company Petition No. 12/2005 filed by the petitioners namely, Shri Dinesh Sharma (P-1) and Smt. Bina Sharma (P-2) under Sections 397/398 of the Companies Act, 1956 alleging "oppression" and "mismanagement" by the respondents namely Vardaan Agrotech Pvt. Ltd. (R-1); Shri Dwaraka Nath (R-2); Smt. Indira Sharma (R-3); Smt. Ekta Sharma (R-4); Smt. Geeta Vats (R-5) and Shri Rajesh Sharma(R-6). The petitioner No. 1 is the son and the Petitioner No. 2 is the daughter-in-law of respondent No.2.

2. The undisputed facts of the case are: The respondent No. 1 company namely, Vardaan Agrotech Pvt. Ltd. was incorporated as a private limited company on 23.10.2000 having its Regd. Office initially at Rohini and then at 29/2, Ground Floor, East Patel Nagar, Delhi. The initial capital of the company was Rs. 1 lakh divided into 10,000 shares of Rs. 10/- each. The company was jointly promoted by P-2 and R-2 by subscribing 2,100 equity shares of Rs.10/- each. As per the records of the Registrar of Companies the authorized share capital of the company at present is Rs. 7,45,00,000 divided into 74,50,000 equity shares of Rs. 10/- each and the issued and subscribed capital of the company is Rs. 7,36,15,000 divided into 73,61,500 equity shares of Rs. 10/- each. Petitioner No. 1 holds Rs. 5,93,300 of Rs. 10/- each (fully paid) and petitioner No. 2 holds 24,100 equity shares (fully paid) including holding 2,100 equity shares by subscribing to the Memorandum and Articles of Association of the company. The petitioners jointly hold 6,48,300 equity shares of Rs. 10/- each. Respondent No. 2 and Petitioners No. 2 were the first directors of the company w.e.f. 23.10.2000. Petitioner No. 1 was appointed as Director and Managing Director of Respondent No. 1 company vide Board's resolution dated 23.7.2002. The Respondent Company is engaged, interlaid, in the business of dehydration, irradiation process, preserving of all kinds of agricultural, horticultural and food items of every description by way of chemical or cobolt-60 nuclear science electron beams or of any other type of dehydration. The project is being implemented under the guidance of the Bhabha Atomic Research Centre and the Atomic Energy Regulations Board with the investment of more than Rs. 10 crores taken from the Technology Development Board (TDB), Ministry of Science and Technology, New Delhi (Rs.4.95 crores), and from the Ministry of Food Processing, New Delhi (Rs.7.42 crores) besides other assistance taken from Banks. The Technology Development Board by sanctioning a loan of Rs. 4.95 crores facilitated the commissioning of the project of the company.

3. Shri Krishna Kumar, counsel for the petitioner contended that Petitioner No. 1 who was the Managing Director of the company appointed vide Board's resolution dated 23.7.2002 has to be the permanent Managing Director of the Company as per Articles of Association. He was also conferred with the single authority to operate the bank account of the company w.e.f 30.8.2002. Petitioner No. 2 along with R-2 had also provided their unconditional personal guarantees and pledged their entire shareholding alongwith Petitioner No. 1 with the TDB and other financial institutions. It was pointed out that more than 50% investment was made by the petitioners at the time of purchasing the land for company's purpose. It was pointed out that the company had only three directors viz. Petitioner No.2, Respondent No.-2 and Petitioner No-1 It was averred that R-2 illegally bypassing and violating the legal provisions of the Companies Act removed the petitioner No. 1 from the directorship of the company by a fictitious resolution of the Annual General Meeting on 30.9.2003 without giving notice of the Annual General Meeting and the Boar Meeting for calling the Annual General Meeting. It was pointed out that such illegal removal of the petitioner from the Board is highly objectionable and oppressive to the petitioner. The counsel for the petitioner pointed out that petitioner No. 2 was also removed from the directorship of the respondent No. 1 on 3.2.2004 by taking self cognizance of Section 283(1)(g) although no such Board Meetings were held by giving any notice/intimation/communication to the petitioners in which the petitioner No. 2 was ever absent voluntarily or intentionally. It was averred in rejoinder affidavit that petitioner No. 2 was allegedly removed on 3.2.2004 when no Board Meeting/General Meeting was possible, as per the certificate at Annexure E at page 29 because R-2 was already hospitalized Saroj Hospital & Heart Institute, Rohini, Delhi for operation on 4.2.2004 and was discharged only on 14.2.2004. Such cessation of office of director of petitioner No. 2 amounted to oppression to the petitioners. Further, it was averred that in the annual return as on 30.9.2003 filed with the Registrar of Companies the respondent NO. 2 incorrectly showed the shareholding of Petitioner No. 1 as 59,330 equity shares instead of 5,93,300 equity shares thus fraudulently reducing the Petitioner No. 1's shareholding to 10% of his actual shareholding. The Respondent No. 2, it was pointed out, had tactfully used the above mistake to make unreasonable gain and cause damage to the petitioners by representing the shareholding of Petitioner No. 2 to a nominal amount and representing virtually the total shareholding of the company to his name. Further, it was pointed out that the petitioner No. 1 and 2 are not being paid their agreed managerial remuneration in the company amounting to Rs. 30,000 each w.e.f. October 2004 to petitioner No. 1 and from Oct.2003 to petitioner No. 2 and that the managerial remunerations have been stopped without assigning any reasons. It was averred that Respondent No. 2 has been conducting the Board Meetings/General Meetings of the company arbitrarily without following the procedures laid down in the Act and Memorandum and Articles of the company. On 27.9.2002 Respondent No. 2 illegally appointed Respondent No. 3 as additional director of the company without giving proper notices and without even having quorum for the meeting as admittedly Respondent No. 2 was the only person present for the meeting. Similarly, the Respondent No. 2 had appointed Respondent No. 4 as additional director on 30.11.2002. Subsequently, Respondent No. 2 had proceeded to appoint Respondent No. 5 and Respondent No. 6 as additional directors on 13.1.2004 on the back of the petitioners without following proper procedure. It was vehemently contended by the counsel for the petitioner that all such appointments were illegal and liable to be held void ab-initio and such appointments were highly objectionable and oppressive to the petitioners. Further, it was pointed out that the respondents conduct was contradictory and no such appointments of additional directors were valid in view of the respondents own letters dated 30.11.2002 and letter dated 16.12.2002 to the Manger IDBI Bank, Pitam Pura Delhi pointing out and admitting that the company had only three directors i.e. Petitioner No. 1, 2 and Respondent No. 2. It was pointed out that Respondent No. 2 had written a similar letter to PNB, Kondli, Sonepat stating that vide resolution dated 15.12.2002 that the company had only three directors i.e. Petitioner No. 1 and 2 and respondent No. 2 for operation of the bank account. This was contradictory to the position as per the alleged resolutions appointing Respondent Nos. 3, 4, 5 and 6 as additional directors. Even PNB, Kondli, Sonepat had taken note of this contradiction and had pointed out to Respondent No. 2 that the bank has been misled. It was pointed out by the counsel for the petitioners that the respondent No. 2 namely Mr. Dwaraka Nath Sharma is a very influential person and he had taken all the bankers and other top officials of the various authorities in his influence by showing his old age and using his past relations and position as he retired from the post of Dy. Director of CBI. Despite the bankers' letter out to the respondent No. 2 that he had misled them and despite the petitioners complaint to the Bank about the irregularities in the utilization of the funds and request to the bank that they should not release the funds in the best interest of the company, the bank continued releasing the funds. Furthermore, it was pointed out that Respondent No. 2 shifted the bank account of the company to the bank of his choice stating himself and respondent Nos. 3, 4 ,5 and 6 as authorized signatories without mentioning the names of the petitioners with the clear objective of isolating and ruining the petitioners. Further, it was pointed out that on the basis of mutual consensus and understanding between petitioners and the respondents it was decided in the Board Meeting dated 23.7.2002 that petitioners and respondents will have 50% of the equity capital of the company. That resolution had not been adhered to till date and no shares have been allotted to the petitioners except the following:

Name of the shareholdingNo. of shares allottedDate of allotment
Smt. Bina Sharma210023.10.2000
2200019.09.2002
Total24100
Sliri Dinesh Sharma59330019.09.2002
Total593300

It was contended that R-2 with a clear intent to reduce the petitioners to an insignificant minority increased the share capital of the company to Rs. 7.36 crores without any further allotment to the petitioners despite the family agreement and the decision taken in the Board Meeting dated 30.8.2002 and despite petitioner No. 1's investment of Rs. 1.73 crore with the company as share application money. The counsel for the petitioners argued that the documents filed with the ROC make it amply clear that the respondents want to oust the petitioners from the company by hook or crook and with their nefarious designs the respondents had very cleverly tried to make a malafide and intentional change in the shareholding. When the petitioner No. 1 was illegally removed the total paid up capital was Rs. 2.7 crores as per annual return filed with the Registrar of Companies on 19.1.2004 and enhancement in shareholding thereafter is illegal and has been knowingly and willfully manipulated only to bring the shareholding of the petitioner to 8.81% so that the petitioners are naturally ousted from the company and will not be able to approach the Hon'ble Board to seek justice. All these acts of R-2 have been highly objectionable besides being illegal and oppressive to the interest of the petitioners and the company. However, it was pointed out that though the respondents had malafidely tried to dilute their equity percentage to such a level that the petitioners cannot approach to the Hon'ble Board but unfortunately they had forgotten to properly and carefully read Section 399 of the Companies Act, 1956 which makes the petitioners still eligible to file the petition under Sections 397 and 398 of the Companies Act, 1956 as the total number of members of the company are 8(eight) and the petitioners, being 2(two) constitute one fourth of the total number of members whieh is far in excess of the limits provided by Section 399 of the Companies Act, 1956. The petitioners were aggrieved because they had no information about the deployment of the funds, they had no access to the books of accounts. They had to file Civil Suit No.85/2005 in the Delhi High Court for rendition of accounts. The suit is still pending. Refuting the charge of forum shopping the counsel argued vehemently that they were in no way pursuing various legal proceedings against the respondents. In fact, the petitioners have been running from pillar to post to bring an end to the mismanagement and oppressive conduct of the respondent NO. 2. The petitioners had tried their level best to inform and seek help of the bankers, other Govt. authorities and the Registrar of Companies before approaching the Hon'ble Company Law Board in the best interest of the company and have approached the CLB only after getting disappointment from every side because of the respondent No. 2 being a very influential person. The Registrar of Companies had not taken any action on their complaint dated 1.3.2004. However, after several reminders the ROC sent the matter to the Regional Director, Kanpur. It was pointed out that nothing has been done even by the RD, Kanpur till date. Refuting the allegation of siphoning off Rs. 150 lakhs the counsel for the petitioners pointed out that the same had been duly accounted for at that time itself and the same had also been duly admitted by the respondent No. 2 at various levels namely in the quarterly reports to the Technology Development Board, the balance sheets of the relevant periods and certificates issued to the suppliers. As regards illegal drawing of remuneration and salary by the petitioners, it was pointed out that the allegations were false and vehemently denied and it was stated that not only petitioner No. 1 and petitioner No. 2 but all the three directors i.e. respondent No. 1 Mr. Dwaraka Nath Sharma, petitioner No. 1 and 2 i.e. Mr. Dinesh Sharma and Mrs. Bina Sharma, each had been paid monthly remuneration as per Board's resolution. The counsel for the petitioners referred to the additional affidavit filed on 21.3.2006 to point out the state of affairs of the statutory records of the company. Para 6 at page 3 of the additional affidavit contained the details of the various alleged irregularities/manipulation of records noticed on inspection of statutory records permitted by the CLB. This Bench's attention was specifically invited to item V in para 6 averring that R-2 is converting R-1 into a Shell Company by disposing off the assets of the company. Shri Krishan Kumar, counsel for the petitioners referred to the Bank statement annexed to CA No. 123/06 mentioned before the CLB on April, 2004 to point out that R-2 has already received an advance of Rs. 35 lakhs from the prospective buyer vide cheque No.551338 credited to Respondent No. 1 A/c on 21.3.2006 in Bank of India. It was alleged that even the registered office of the company has been shifted from East Patel Nagar, New Delhi to E-49, Karam Pura, Milan Cinema Road, New Delhi-110015 and the R-2 is trying to create liabilities of the shareholders of the company by taking huge loans from the bank and is also trying to manipulate the accounts of the respondent company for his own benefit at the cost, risk and consequences of the shareholders of the company. Hence, the petitioners reiterated their prayers seeking declaration of all resolutions as illegal and void; immediate stopping of the oppressive conduct of R-2; superceding of the Board of Directors of R-1 company by appointment of an Administrator who would convene general meetings of the company for appointment of new Board of Directors to take charge of the affairs of the company and for vesting management of the company in the said Board; declaration of further allotment of shares as void; allowing of petitioners further equity shares against their share application money permitting to invest in 50% of the equity capital of the company; taking away of the control and management of the company from respondent Nos. 2 to 6; and removal of petitioners from directorship of the company to be declared as null and void.

4. Shri M. Dutta, counsel for the respondents argued that the petition is not maintainable as the shareholding of the petitioners comprises of 8.81% only, their shareholding being Rs. 6,48,300 equity shares of Rs. 10/- each. It was pointed out that as per the Annual Return dated 29.9.2004 (Annexure R-4) the total authorized share capital of the company is Rs. 7.45,00,000 consisting of 74,50,000 equity shares of Rs. 10 each and R-1's issued/subscribed and fully paid up capital is Rs. 7,36,15,000 comprising 7,36,500 equity shares of Rs. 10 each, and hence, invocation under Sections 397/398 fails due to an ineligibility under Section 399 of the Companies Act. The respondents denied that the authorized share capital of the company is Rs. 4,95,00,000 divided into 4,95,000 equity shares of Rs. 10/- each as deemed by the petitioners. The respondents admitted that in the annual return as on 30.9.2003 filed with the Registrar of Companies only due to typographical errors the shareholding of petitioner No. 1 was shown as 59,330 equity shares instead of 5,93,300 equity shares and this mistake was corrected while filing the annual return dated 29.9.2004 with the Registrar of Companies NCT of Delhi and Haryana. It was alleged that the petitioner has not invested even a penny in the company nor has he given any money for share allotment as can be seen from the copy of the bank statement of the petitioners from wherein he withdrew cash from the Company and then deposited the same in cheque in the Company's account. It was further argued that the petitioners have not come with clean hands as petitioner No. 1 is guilty of misappropriation of funds of the company to the tune of Rs. 150 lakhs and breach of trust during the period when he was a single signatory of bank accounts of the company. Thus he acted against the interest of the company and the project implementation schedule was delayed for more than two years due to his misconduct and mystification of funds. It was pointed out that the bank statement of the petitioners clearly demonstrates that before he became the authorized signatory there was hardly any amount in his account but after August, 2002 there are heavy transactions with lakhs of rupees but after cessation as the Director of the Company and withdrawal of power as single authorized signatory to the bank account, there is no inflow or outflow of any significant amount. Therefore, it was argued, from the Bank statement itself it is clearly evident that petitioner No. 1 has misappropriated the funds of the company and further it proves that he has not invested any amount nor has he given any money for allotment of shares. Hence, there is no question of retaining any amount by the respondents or not allotting any shares in lieu of the money given by him to the company. It was further argued that the petitioners have acted against the interest of the respondent company by making false and frivolous complaints to various government organizations including banks and financial institutions resulting in tarnishing the image and goodwill of the respondent company and hampering the progress of the respondent company by their illegal and unwarranted actions which have been undesirable and unjustified. It was pointed out that the petitioners have indulged in forum shopping and have not disclosed the facts of initiating other proceedings in the petition which is a mandatory requirement under the Company Law Board Regulations 1991. It was pointed out that the petitioners vilification campaigns in the form of complaints not only tarnished the image of the company but also affected its growth, working and profitability. Knowing the conduct of the petitioners the Chairman and Managing Director of R-1 company namely, Shri Dwaraka Nath (R-2) wrote a letter dated 4,2.2003 to the Registrar of Companies requesting the Registrar to keep the respondent company's file in safe custody and not to take on record any documents pertaining to the respondent company which does not bear the signature of the Chairman and Managing Director of the company. However, despite such letter dated 4.2.2003 Petitioner No. 1 managed to file Form No. 32 with the Registrar of Companies. It was further pointed out that the petitioners forced the respondent No. 2 and 3 to sign on the papers of Board Meetings dated 23.7.2002. However, the said resolution has never been passed and given effect to. It was not made part of the Articles of Association of the respondent company and the said minutes could not be relied upon. It was further pointed out that the petitioner No. 1 forcibly, illegally and unlawfully has taken away some records of the respondent company by breaking the locks and to that effect a complaint was also filed with the Local Police Station i.e. to S.H.O Kondli vide complaint dated 3.7.2004. It was argued that the petitioner NO. 1 was an Additional Director and he was indulging in misappropriating and siphoning off funds and was acting against the interest of the respondent company hence he was not confirmed by the shareholders in the Annual General Meeting held on 30.9.2003 and, therefore, he ceased to be the Director of the company and there is no question of any illegal action or oppression on the part of the respondent company. As regards petitioner NO. 2, it was argued that Smt. Bina Sharma, (P-2) wife of petitioner No. 1 vacated office by way of operation of law under Section 283(1)(g) of the Companies Act on her failure to attend three or more consecutive Board Meetings as recognized/provided under the said Section. Further, it was pointed out that no argument was ever addressed by the petitioner to question such vacation of office. Furthermore, it was argued that the entire complaint through petition under Sections 397/398 of the Act revolves towards submitting sole grievance of the petitioners' that they have been removed from the post of the directors in an illegal manner, that apart the complaint does not disclose any other alleged grievance that meets the requirements of either Section 397 or 398. Shri M. Dutta reiterated that it is settled law that removal of a director by a competent Board or otherwise cannot be the subject matter of petition under Sections 397/398. It was argued that in the present case the petitioners were duly removed in accordance and compliance with the applicable law. Furthermore, the, petitioners had not challenged the Board's resolution dated 30.9.2003 that resolved to remove the petitioner from the post of the Director. In the absence of any challenge to the said resolution no further grievance can be addressed by the petitioner No. 1. Shri M. Dutta relied on the decision in Hanuman Prasad Bagri and Ors. v. Bagrees Cereals Pvt. Ltd. and Ors. to submit that directorial complaints cannot be agitated by way of Sections 397/398 of the Companies Act. Shri Dutta further argued that the petitioners invoking Sections 397/398 of the Act have failed to meet requirements of the said Sections. It was pointed put that for all purposes the complaint has failed to allege any instance/incident that can be termed even remotely to be an act or instance prejudicial to the interest of the company or a member. Furthermore, Board's attention was drawn to the so called Board Meeting dated 23.7.2002 on which the petitioners relied on the basis of mutual consensus and understanding that petitioners and respondents will have 50% of the equity capital of the company. It was pointed out that this document cannot be relied upon. It has not been adhered to till date and no shares have been allotted to the petitioners in compliance with the so called resolution dated 23.7.2002 as the said documents, have been sought to be cancelled in the proceedings, registered as Civil Suit, 85/2005 pending before the Hon'ble High Court of Delhi. The petitioners filed this Civil Suit on 25.10.2004 for rendition of accounts. In the said Suit, the respondent No. 2, by way of his written statement and Counter Claim, has categorically conveyed that the said documents were obtained by means unknown to law, and, therefore, are liable to be cancelled. It was argued that such disputed questions, the question of validity, sanctity of documents cannot be decided or adjudicated in summary proceedings under Sections 397/398 and that such disputed questions can only be addressed/adjudicated by way of a trial in Civil proceedings and that the petitioners have already sought recourse before the Civil Court and are thus precluded from seeking reliance or an adjudication based on such documents as the respondent being 70 years of age was made to sign these documents by the petitioner through coercion, intimidation and threats and such documents were obtained by means unknown to law. Further, it was pointed out that the family agreement dated 15.12.2002 relied upon by the petitioners is not a part of the Articles of Association of the company nor has been acted upon by the parties. Responding to the petitioners' charge of shifting of bank account, it was pointed out that the respondents changed the bank account of the company to another bank after following the due process of law and as per the requirements of the financial institutions. The Bank of India being the financer in the project, therefore, all bank accounts of the company were shifted to the Bank of India and the Board of Directors approved respondent Nos. 3 to 6 as authorized signatories in order to keep a check and not to repeat the mistake of giving one person the charge of the bank operation as was done in the past. It was pointed out that the respondent No. 2 had committed the mistake of making petitioner No. 1 the single signatory authority to operate the bank account of the company making him responsible to look after the, day to day functioning of the company w.e.f. 30.8.2002. The petitioner No. 1 had misused the said powers given to him by indulging in misappropriating and siphoning off funds to the extent of Rs. 150 lakhs. The petitioners even withdrew their guarantee from the bank and now the respondents are guarantors of the said loan. It was further pointed out that when the financial irregularities were found by the board the powers given to the petitioner were withdrawn and a notice to this effect was published in the Punjab Kesari on 9.3.2004. It was pointed out that there is no question of paying managerial remuneration to the petitioner as till date no director has taken any remuneration from the company as the directors have been working on honorary basis. In, fact, the petitioner No. 1 during his tenure as managing director had been wrongfully withdrawing money as salary from the account unilaterally without the permission of the Board. Shri Dutta further argued that no reliance can be placed on the petitioners' affidavit dated 20.3.2006 alleging certain incorrect and wrong conduct as the petitioners did not seek permission to remove certain defects in his case by seeking permission to file certain affidavits/interim applications including affidavit dated 20.3.2006. Even otherwise it was argued by way of abundant precaution by Shri Dutta that all averments/allegations made in the said affidavit are wrong, incorrect and illegal. The counsel vehemently and emphatically denied these averments/allegations both individually and specifically. The counsel argued that it would be ridiculous and absurd to even remotely consider or accept the bogus and absurd pleas of the petitioner as raised in the affidavit dated 20.3.2006. Shri N. Dutta vehemently argued that the petition is without merit, incompetent, illegal, malafide and explicitly extraneous/outside the ambit of Sections 397 and 398 of the Companies Act and hence deserved to be dismissed with cost in favour of the respondents and against the petitioners.

5. I have considered the pleadings and the documents filed therewith as well as the arguments of the counsels for the petitioners and the respondents. Petitioners' case is that of "oppression" and "mismanagement". Increasing of authorized share capital and allotment of additional shares is alleged to be malafide besides not being in. the interest of the company and being in violation of the proper and legal procedure prescribed. By manipulating the allotment of shares; by removal of petitioners from directorship; by appointing new directors the respondents gained control of the company and siphoned off funds. According to the petitioner though it is fit case for winding up, the winding up order would clearly "prejudice the interest of the petitioners because of the fact of illegal reduction in their share holdings and because of siphoning off funds and further that the interest and public purpose of the financial institutions has been compromised by gross manipulation of records and converting the company into a Shell Company by receiving advance for disposing off the assets of the company. The respondents case is that the petition is not maintainable as the shareholding of the petitioners comprises of 8.81% of the shares; removal from directorship cannot be agitated under Sections 397/398 of the Act; the petitioners have indulged in forum shopping; the petitioner No. 1 has misappropriated the funds of the company and has damaged and delayed the project of the company; the petitioners have not come with clean hands; the petitioners have not be able to point out a single instance of "mismanagement" and "oppression".

6. On consideration of the facts and circumstances of the case, I find that the respondents have failed to refute the allegations levelled against them. Preliminary objections raised by the respondents are not tenable. As regards the objection that the petitioners hold less than 10% of the total issued, subscribed and paid up capital of the company, the petitioners have claimed holding of 6,48,300 equity shares of Rs. 10/- each. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be to then only other allegations in the petition would be examined. In the present case, the petitioners' plea is that the respondents had very cleverly proceeded to make a malafide and intentional change in the shareholding. It has been alleged that the respondents started with their nefarious design when the petitioner No. 1 was illegally removed and that before the illegal removal of the petitioners on 30.9.2002 and 3.2.2004 the total paid up capital of the respondent company was Rs. 2.7 crores as per the annual return filed with the Registrar of Companies on 19.1.2004 and not Rs. 7.45 crores as claimed by the respondents. The illegal increase in share capital and allotments made on 16,2.2004 were done without justification to cause prejudice to the petitioners and to reduce them into a hopeless minority so that the petitioners are naturally ousted from the company and would not be able to approach the Company Law Board to seek justice. However, the petitioners are eligible under Section 399. Even despite the alleged oppressive reduction of their shareholding to 8.81% they constitute 14th of the total 8 members of the company which is far in excess of the limits provided under Section 399 of the Act. In the present case, the petitioners' plea is that as per family agreement and Board's resolution dated 23.7.2002 their shareholding was to be 50% of the equity of the company and the respondents have illegally marginalized and reduced the petitioners to a hopeless minority. Therefore, 4.his petition cannot be dismissed at the threshold before examining as to whether the issue of further shares would be considered to be an act of oppression against the petitioners. As regards the second preliminary objection that the petitioners did not disclose filing of a Civil Suit pending before the High Court, though the respondents' allegation is found to be correct I am inclined to accept the petitioner's contention that filing of Civil Suit No. 85 of 2005 was for rendition of accounts as the petitioners were aggrieved because they had no information about the deployment of the funds, they had no access to the books of accounts. The petitioners' contention that they "have not indulged in forum shopping is found to be correct. In fact, the petitioners approached the Company Law Board only after not getting any response to their complaints to the Registrar of Companies, the Financial Institutions including the Bankers and other Govt. authorities.

7. As regards respondents' reliance on the decision of the Supreme Court in Bagree's case Hanuman Prasad Bagree Cereals P. Ltd (2001) 2 Comp LJ 392 (SC) to submit that directorial complaints cannot be agitated by way of petition under petition under Sections 397/398 of the Companies Act and that unless the petitioners establish that the company is liable to be wound up on just and equitable grounds, and that such winding up would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, after observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ).

Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out far winding up petition on just and equitable grounds, no relief could be granted to the petitioners.

It found that the only substantive allegation relating to the removal of the petitioner as a director could be agitated in a suit, and this would not justify winding up on just and equitable grounds. As a principle, directorial complaints cannot be a ground in a petition under Section 397/398 as the complaints in such a petition should be relating to the rights qua a member. While, as a proposition, it is so in normal circumstances, yet, in cases of family companies or companies in the nature of partnership, depending on the facts of the case, directorial complaints have been adjudicated by this Board in Section 397/398 proceedings. In any view of the matter, in the present case, the petition is a composite petition wherein not only directorial complaints are made, but also complaints relating to conversion of majority into minority. Further, when the promoter having high stake in the company complaints of her exclusion from the management, petitioner No. 2 was the promoter and first director of the company, 1 fee! that equity demands that her complaint should be inquired into in the present proceedings. However, in the present case, the claims of the petitioners are of their claim of quasi-partnership and by denying the petitioners a representation on the Board, they are being oppressed by the majority shareholders. In case of dissolution of a partnership, the just and equitable grounds are wider than the just and equitable grounds applicable in the case of winding up of a company. Similar objection was examined by this Board in Anupar Chemicals case Dipik G. Mehta v. Shree Anupar Chemicals P. Ltd. (1999) 2 Comp LJ 539 CLB, Supra, as follows (para 30 at pages 555 and 556 of Comp. LJ)-

The learned Counsel for the respondents submitted that the petitioners have not established that grounds exist for winding up of the company on just and equitable grounds. He also relied on the judgment of Bombay High Court that, on similar allegations, the court held that there was no ground to wind up the company on just and equitable grounds. We would like to differentiate between a winding up proceeding and a proceeding under Section 397. In a winding up proceeding on just and equitable grounds, the court may order winding up once the grounds are established. However, in a Section 397 petition, which is alternative to a winding up petition first, one has to establish that there is oppression. Without the element of oppression being established, the question of grant of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Sections 397/398, proceedings are alternative to a winding up proceedings, it is not that only those which are considered to be just and equitable in a winding up proceedings to be the grounds in a Sections 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be wound up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Cooperative Wholesale Society (1954) Scottish Case 381 - referred to in Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC) : (1981) 51 Comp Case 743 (SC), wherein it was held-

Although the words, 'oppressive' is not defined, it is possible, by way of illustration, to figure a situation in which majority shareholders, by an abuse of their predominant voting power, are treating the company and its affairs as if they were their own property to the prejudice of the minority shareholders and in which just and equitable grounds would exist for the making of a winding up order...but in which the alternative remedy provided by Section 210 by way of an appropriate order might well be opened to the minority shareholders with a view to bring to an end the oppressive conduct on the minority.
In the present case, the petitioners have established oppression as would be clear from the ensuing paragraphs and since the principles of partnership are applied in this "case, denial of legitimate representation could be a just and equitable ground for dissolution of a partnership and, therefore, the company could be wound up on just and equitable grounds. In the present case winding up of the company would not be in the interest of the company and the shareholders. However, proceedings under Sections 397/398 are beneficial provisions to get grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members.

8. Further, I agree that it is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under Sections 397/398. In Sri Kanta Datta Narasimharaja Wadiyar v. Venkateshwar Real Estates Private Ltd. (1991) 3 Comp. LJ 336 (Karn) : (1991) 72 Comp Cas 211 (Karn), it was held that the petitioner seeking equitable relief must come with clean hands and good conduct, failing which the petitioner would constitute a gross abuse of the process of Court, and the petitioner is not entitled for any relief under Sections 397 and 398. It also held that the conduct of the parties in other proceedings could also be taken into consideration. However, it was held that the conduct of the petitioner before filing of the petition may not be a relevant factor. Regarding the principle of equity in Shrimati Abnash Kaur v. Lord Krishna Sugar Mills Ltd (44 CC 390) the Division Bench of Delhi High Court has held that while exercising equity jurisdiction, which clothes the Court with discretionary powers "... the discretion cannot be exercised arbitrarily or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands...." There have been allegations and counter allegations. In view of contradictory positions and acquiescence of respondents as is evident in the ensuing paragraphs the petition cannot be dismissed at the threshold.

9. It is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. On considering the present case on merits, I find that all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act of oppression and how the company is a party to the oppression. It is a well settled proposition that the provision of Sections 397 and 398 are to be invoked to get the grievances of oppression and mismanagement redressed. As per Board's resolution dated 23.7.2002 annexed to the petition at p. 19 petitioner No. 1 had been appointed as permanent managing director in the company and it had also been resolved that he would be paid a remuneration of not less than Rs. 30,000 par month from the date of disbursement of TDB loan and that his services would not be terminated without having a written consent from him. This resolution also recorded that he has been awarded 50% equity for the work he has done in the company and that the equity of 50% will not be reduced at any point of time. The counsel for the respondents had challenged this document pointing out that this has been got signed from R-2, who was the chairman and MD, by the petitioners through coercion and fraud and the same has been challenged in the counter claim filed in the civil suit in the High Court filed by the petitioner for rendition of accounts. According to the petitioners, challenging of this resolution was only an afterthought of the respondents while filing counter claim to the suit before the High Court for rendition of accounts. However, it is noticed that as per minutes of the meeting held on 15.12.2002, annexed at pages 57-58 to the petition it has been recorded in the minutes that Shri Dinesh Sharma (i.e petitioner No. 1). would be "the soul authorized signatory to operate all company accounts and company affairs being the managing director.


2. ...The shares of the company will be held within the Board and that they will not be transferred to anyone outside the board at any point of time. And that all the shares of Mr. Dwarka Nath will be transferred in Mr. Dinesh Sharma's name.


3. The status of the Board will remain as it was on 14.10.2002, with three directors namely Dwarka Nath, Dinesh Sharma and Bina Sharma.


4. That Mr. Dwarka Nath will not interfere in the day to day functioning of the company,...Directors (any one) must nor he be authorized to sign or pass any resolution.


5. Mr. Dwarka Nath will be entitled to a remuneration of Rs. 1 lakh per month and that he will facilitate the disbursement of loans etc.


6. The day to day working of the company will be done by Mr. Dinesh Sharma/Mrs. Bina Sharma who are authorized to enter into any control open and operate bank accounts on behalf of the company. Mr. Dwarka Nath will not withdraw, make amendments regarding this resolution.

7. That Dr. Rajesh Sharma and Dr. Sonu Sharma and their heirs and any member of the in laws of Shri Dinesh Sharma or any other person shall not be entitled to any shares in the company whatsoever form.

8. It is decided that the resolution passed by Mr. Dwarka Nath for appointment/removal of Mrs Indira Sharma and Mr. Dinesh Sharma respectively are null and void as the quorum of Board will not be fulfilled neither any notices were issued.


As per the Board's resolution dated 23.7.2002 petitioner No. 1 is to be the permanent MD of the company. Respondents claimed his removal as per Board's resolution dated 30.9.2003 and pointed out that resolution dated 23.7.2002 was got signed under coercion and fraud and the same has been challenged in the counter claim filed before the High Court. But the respondents are silent about the Board's meeting held on 15.12.2002 recording the minutes (as produced above) that petitioner No. 1, 2' and R-2 are the only three Directors. The Respondents' claim of appointment of R-3 and R-4 till 15.12.2002 is not borne out from the records. As per para 8 of these minutes the resolution passed by R-2 for appointment of additional directors and removal of petitioner No. 1 and petitioner No. 2 have been declared as null and void as the quorum for the Board was not fulfilled and neither any notices were sent. It reflects the state of affairs of the respondent company in control of R-2. The respondents claim of removal of petitioner No. 1 from the Directorship and cessation of petitioner No. 2 in compliance of Section 283(1)(g) is negatived by these minutes. Further, the respondents' letters to the Bankers reiterating that there are only three directors support the petitioners' contention and reveal contradictory position averred by the petitioners. Petitioners have vehemently argued that the Board's resolutions removing the petitioners from directorship and appointment of additional directors have been passed exclusively by R-2 arbitrarily without complying with the procedures laid down. It has been rightly pointed out that R-2 was the only director left after alleged removal of petitioner No. 1 and cessation of petition No. 2. Furthermore, it has been pointed out that the Registrar of Companies has not been informed about such changes.

10. As regards increase in the share capital of the company, and further allotments the respondents have not been able to prove the necessity of such increase and following of proper procedure for allotment. The facts of this case do not warrant such increase. Nothing was placed on record to show the need of the company for further investment and hence need for allotment of additional shares. In view of the doctrine of "proper purpose", it follows that in the matter of issue of shares, Directors owe a fiduciary duty to shareholders of the company to issue shares for a proper purpose. The fiduciary capacity within which Directors have to act enjoins upon them a duty to act on behalf of the company with utmost care and skill and due diligence and in the interest of the company. They have a duty to make full and honest disclosure to shareholders regarding all important matters relating to the company. Shares issued for maintenance and acquisition of control over the company is an extraneous purpose, and, therefore, cannot be upheld. In Needle Industries' case the Supreme Court referred to some old English decision with approval. Punt v. Symons was quoted (at SCC P. 394, para 105) in which it was held:
Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used.


Piercy v. S. Mills and Co. Ltd. applied the same principle while holding:

(All ER p.316 E-E).


The basis of both cases is, as I understand, that Directors are not, entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding.

The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. In the present case the conclusion is inevitable that neither was the allotment of additional shares in favour of respondents bonafide nor was it in the interest of the company nor was a proper and legal procedure followed to make the allotment. The motive for the allotment was malafide. On facts, impugned allotment of additional shares was done with the sole object of gaining control of company by becoming majority shareholder was clearly an act of oppression on the part of the respondents. Moreso, as the meetings passing such resolutions were held at the back of the petitioners without giving proper notices and without following proper procedure. Regarding service of notices, it is settled law that the onus to prove service rests on the sender. That onus has not been discharged.

11. There have been allegations and counter allegations regarding manipulation of records. But it is a fact that the petitioners' complaint to the Registrar of Companies regarding this and the matter under Section 234(1) is still pending with the R.D. Kanpur till date. Furthermore, the petitioners Civil Suit regarding rendition of accounts is also pending with the Delhi High Court. Then the respondents' complaint dated 3.7.2004 to the SHO, Kondli, Sonepat regarding breaking open of the locks and taking away of the records is also pending. And as mentioned earlier, the respondents in their counter claim to the High Court have averred seeking of cancellation of the so called resolution dated 23.7.2002 on the ground that R-2's signatures have been obtained under coercion and undue influence and fraud. The financial institutions also point out that they have been misled. PNB Kondli, Sonepat also took notice of the contradictory position. However, on 17.4.2006 in their hearing before this Board the respondents waived their right to file reply to the petitioners' affidavit dated 20.3.2006 (filed with CLB on 21.3.2006). In this affidavit, as pointed out earlier, the petitioners had alleged gross irregularities/manipulation of accounts and records of the respondent company besides pointing out that the R-2 had received an advance of Rs. 35 lakhs to sell off the assets of the company. The respondents also chose not to reply to the petitioners' CA No. 123 mentioned before the CLB on 17.4.2006 to reiterate the acts of mismanagement and to express apprehension that the R-2 was conducting the affairs of the company for his own benefits at the cost, risk and consequences prejudicial to the company and the shareholders by disposing off the assets of the company and converting it into a Shell company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares, appointing directors and removing the petitioners as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside.

12. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the facts of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations. To safeguard the interest of the financial institutions who chose to fund such a prestigious project in the interest of the country and to do substantial justice between the parties, I order as follows:


I. The resolutions of the R-1 company removing the P-1 and the P-2 from directorship and appointing R-3, R-4, R-5 and R-6 as additional directors are hereby declared as null and void and status quo ante is restored.


II. Since nothing has been placed on record to show the need of the company for further investment and hence need for allotment of additional shares, I hold the action of increase in the share capital and allotment of additional shares to be totally malafide, only motive being to gain control of company, hence increase in the share capital and allotment of additional shares is hereby set aside.


III. To safeguard the interest of financial institutions namely, the Technology Development Board, Department of Science and Technology, Ministry of Science and Technology, Technology Bhawan, New Mehrauli Raod, New Delhi-110016; Ministry of Food Processing Industries, Panchsheel Bhawan, August Kranti Marg, New Delhi-110049; and the Bank of India, New Delhi Corporate Bhawan Banking Branch, 37, Shaheed Bhagat Singh Marg, (Near Shivaji Stadium), New Delhi-110001 - these organizations are hereby directed to nominate one director each on the Board of the R-1 company with immediate effect. Such nominee directors would continue to be on the Board of the R-1 company till the funds advanced by these organizations are recovered/repaid. The minimum quorum for Board Meetings would comprise two directors one out of which must be from one of these financial institutions.


IV. The Board of Directors constituted in compliance of this order at III above, in its first meeting to be held within one month of this order shall appoint auditors and order special audit to audit the accounts of the R-1 company from its inception till date within a period of three months from the date of this order. Such audited accounts must be made available to the Ministry of Company Affairs, New Delhi, to the Registrar of Companies, New Delhi; to the Regional Director, Kanpur and to the financial institutions forthwith. The R-l company shall pay audit fees @ Rs. 50,000/- for each accounting year.

13. With the above directions, I dispose of this petition. No order as to cost.
 

 

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