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Shri Kishan Khariwal vs The Ganganagar Industries ... on 6 October, 2003

Company Law Board
Shri Kishan Khariwal vs The Ganganagar Industries ... on 6 October, 2003
 
Equivalent citations: 2004 118 CompCas 626 CLB, 2004 50 SCL 567 CLB
 
Bench: S Balasubramanian
 
ORDER S. Balasubramanian, Chairman 
 
1. The petitioner claiming to hold 606 equity shares of Rs. 20/- each and also having authority in the form of Power of Attorneys from 7 other shareholders holding an aggregate 928 equity shares and also a consent letter from holder of 300 fully paid equity shares totally constituting 10.35% of the total paid up capital of M/S Ganganagar Industries Limited (the company) has filed this petition under Sections 397/398 of the Companies Act, 1956 (the Act) alleging acts of oppression and mismanagement in the affairs of the company. The main allegations are that the 2nd respondent, the Managing Director, by mis-representing a portion of the industrial land held by the company as agricultural land has sold the same at a throw away price of Rs. 40 lacs as against the market value of Rs. 2 crores to his own people in breach of his fiduciary duties and that by virtue of a resolution passed under Section 81(1A) of the Act in an EOGM held on 25.1.2001 authorising the company to issue and allot not more than 82280 equity shares and another resolution passed under the same section in an EOGM held on 28.2.2001 allotted further shares to a number of members of the company excluding the petitioners' group and alleging that these allotments were made for the sole purpose of reducing the shareholdings of the petitioners' group as there was no need for fresh funds for the company. He has also alleged that the accounts of the company are maintained in such a way so as to reduce the profits. The company is paying 24% interest on the loans taken from the directors with a view to reduce the profitability of the company and the statutory auditors of the company, namely, the 8th respondent are manipulating the accounts of the company. Accordingly, the petitioner has sought for setting aside the sale of the factory land and allotment of shares made in pursuance to the resolutions passed in the EOGMs, removal of the 2nd respondent as the managing director and for ordering an investigation into the affairs of the company. 
 
2. In the reply, the 2nd respondent has while denying the allegations, has also questioned the maintainability of the petition in terms of Section 399 of the Act as with the increase in the share capital, the holding of the petitioners' group is less than 1% and even the total number of petitioners is less than 10% of the total number of members of 95. The respondent has also alleged that some of the shares allegedly held by the petitioners do not belong to him and signatures of some of the shareholders who have given the power of attorney in favour of the petitioner do not tally with the specimen signatures maintained in the company and the person who has given consent is not a member of the company. According to the respondents this petition has been filed only because the company has filed a case against a firm belonging to the petitioner's family for eviction from the land and building of the respondent company the possession of which was unauthorizedly given by the petitioner to the firm when he was a director of the company and therefore this petition has been filed mala fide and for an oblique purpose of putting pressure on the company to withdraw the eviction case. 
 
3. The authorized representative of the petitioner reiterated the allegations in the petition while the authorized representative of the respondents denied all the allegations and he also questioned the maintainability of the petition in terms of Section 399. 
 
4. I have considered the pleadings and arguments. To maintain a petition under Section 397/398 the provisions of Section 399 have to be complied with. According to this Section, to maintain a petition under Section 397/398, the petitioners should hold either 10% or more shares of the subscribed capital or should constitute 10% or more of the total members in the company. In the present case, the petitioner has claimed that the shares held by him together with those of the members supporting him, account for 10.35% shares in the company and such the requirements of Section 399 are satisfied. This percentage is based on the share capital of the company before the issue of further shares impugned in the petition. This Board has always taken the view that if the shareholding of the petitioners is reduced below 10% of 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 allegation 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 so, then only other allegations in the petition would be examined. In the present case, the petitioner claims the support of those holding more than 10% shares and he has also impugned the further issue of shares, which has resulted in the holding of the petitioner and his supporters to around 1%. Therefore, this petition cannot be dismissed at the threshold before examining as to whether the issue of further shares could be considered to be an act of oppression against the petitioner and his supporters. 
 
5. However, the respondents have questioned even the shareholdings claimed by the petitioner and his supporters before issue of further shares, The subscribed capital of the company comprised of 17720 fully paid equity shares of Rs. 20/- each before issue of further shares. Therefore, the maintain this petition, the petitioner and his supporters should hold not less than 10% shares i.e. 1772 shares. According to the petitioner, he is holding 606 equity shares and those 7 shareholders who have given power of attorney, 928 equity shares and Shri Chetan Sethia who has given letter of consent holds 300 shares. Thus, the total number of shares claimed to be held by the petitioner and his supporters account to 1834 equity shares. According to the respondents, the petitioner by himself holds only 530 shares and not 606 shares as claimed by him. According to them, 36 shares allegedly claimed by the petitioner are registered in the name of some other shareholder. Likewise, another 40 equity shares are held in the name of another shareholder. In the rejoinder, the petitioner other than denying the averments of the respondents in this regard has not furnished any details as to how he claims ownership of these 76 shares. Therefore, in the absence of any proof that the petitioner is holder of these 76 shares, they have to be excluded in computation of the total shareholding of the petitioner and his supporters. Further, the respondents have also taken a stand that Shri Chetan Sethia who has given the consent to file this petition is not a member of the company and if so, his holding of 300 shares should also be excluded. If it is done so, then, the shareholding of the petitioner and his supporters would account to only 1458 equity shares which is less than 10% of the subscribed shares of 17720 shares in existence before further issue of shares impugned in the petition. Therefore, the petitioner and his supporters do not satisfy the shareholding requirement in terms of Section 399 to maintain this petition. 
 
6. As far as the total number of members is concerned, according to the petitioner, there were 62 shareholders as on 30th September, 2000 while according to the respondents, the total number of members was 95 as on 29.9.2001. The respondents have alleged that Shri Chetan Sethia is not a shareholder of the company and the signatures of two persons who have given power of attorney do not tally with the specimen signatures available in the company and therefore according to the respondents, the total number of members supporting the petition including the petitioner would be only 6 which is less than 10% of 95 members in the company and as such numerically also this petition is not maintainable. Even though in the petition, the petitioner has stated that the number of shareholders as per the annual return made up to 30th September, 2000 (before issue of further shares in 2001) was 62, he has not enclosed a copy of the annual return to verify this fact. As a matter of fact, in paragraph 26 of the petition, he has averred that further issue of shares was made to 18 persons of which 16 were existing members. It would mean that only two members were added by issue of further shares and the number of members before the issue of further shares should have been 93. In the rejoinder, the petitioner has not challenged the averments of the respondents that as on September, 2001, there were 95 members and he has also not challenged the respondents contention that Shri Chetan Sethia is not a shareholder of the company. This being the position, it is evident that the petitioner and his supporters do not constitute 10% of the total number of members in the company. 
In view of the fact that neither the petitioner and his supporters held 10% or more of the subscribed capital nor they constituted 10% or more of the total number of shareholders in the company even before further issue of shares impugned in the petition, this petition does not satisfy the requirements of Section 399 of the Act and therefore deserves to be dismissed as not maintainable. 
 
8. Further, the petitioner has not made out any case of oppression or mismanagement in the affairs of the company as is evident form the following: The petitioner has alleged that the company has sold a part of the factory land misrepresenting it as agricultural land and that the same has been sold at a throw away price of Rs. 40 lacs as against the market rate of Rs. 2 crores to the associates of the 2nd respondent. The piece of land was sold with the authority of the general body in the EOGM held on 28th Feb. 2001. The sale price had been approved by the Board of Directors in the meeting held on 3rd April, 2001 and the sale has not been made to any individual but to an association of persons, namely, Wholesale General Merchants Market Samiti. The sale agreement has been registered by the registering authority. This being the position, I do not find that in selling this piece of land, the 2nd respondent has breached his fiduciary responsibilities in any manner. As far as further issue of shares is concerned, according to the respondents, the petitioner was present in the EOGM held on 25th January, 2001 and 28th Feb., 2001 when resolutions under Section 81(1A) were passed and as such he cannot question the allotment. In the rejoinder, the petitioner has not contradicted this averment of the respondents. If the petitioner had been present in the meeting and if the general body had permitted issue of further shares in terms of Section 81(1A) of the Act, the petitioner cannot challenge the allotment in the present proceedings. As for as the allegations regarding the accounts of the company, nothing has been substantiated to indicate that either the accounts were fabricated or undue benefits have been taken by the respondents. 
 
9. On an overall analysis of this case, I find that the petition deserves to be dismissed not only on the ground that the requirements of Section 399 of the Act are not satisfied but also on the ground that none of the allegations has been established. Accordingly I dismiss the petition with no order as to costs. 
 

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