Present: 1. Shri S. Balasubramanian, Vice-Chairman.
2. Shri K.K.Balu,
Member.
IN THE MATTER OF COMPANIES ACT, 1956 (1 OF 1956)
AND
IN THE MATTER OF M/S LOGIX
ELECTRONICS PRIVATE LIMITED
PETITIONER:
S.
Pattabhiraman
RESPONDENTS:
1. S. Venkataramanan
2. M/s Logix Electronics Private Limited
3. State Bank of India, Chennai-20.
4. Larsen and Toubro Limited
PRESENT ON BEHALF OF PARTIES:
1. Shri V.Balasubramanian, Counsel … for Petitioner
2. Shri V.Ramasubramanian, Counsel … for 1st Respondent
3. Shri K.S.Sundar, Counsel … for
3rd Respondent
4. Ms. G.N.Usha Nandhini, Counsel … for 3rd Respondent
5. Shri R.Murari, Counsel … for 4th Respondent
O R D E R
(Date of Hearing: 20.11.2002)
K.K. BALU:
1.
The petitioner holding more
than 10 per cent of the paid-up capital in M/s Logics Electronics Private
Limited (“the Company”) has filed this petition under section 397/398 of the
Companies, 1956 (“the Act”) alleging various acts of oppression and
mismanagement in the affairs of the Company.
2.
The main acts of oppression
and mismanagement in the affairs of the Company, agitated in the petition
relate to the following: -
(a) diversion of the funds of the Company to its supplier by the
first respondent in connivance with respondents 3 & 4;
(b) diversion of the business of the Company by the first
respondent to his firm;
(c) illegal removal of stocks of the Company by the first
respondent;
(d) prevention of the petitioner from entering the registered
office as well as the factory premises by the first respondent;
(e) diversion of funds of the Company; and
(f)
non-compliance with statutory
requirements by the first respondent.
3. Shri
V.Balasubramanian, Advocate for the petitioner while initiating arguments has
submitted that the Company was incorporated in the year 1995 with the main
objects to manufacture and trade in micro processor based process control
instruments, industrial automation etc.
The petitioner and his wife hold 50 per cent of the equity shares and
the first respondent together with his wife hold the remaining 50 per cent of
the equity shares of the Company. The
petitioner and the first respondent are directors of the Company. In the normal course of business, the Bombay
Municipal Corporation have placed an order with the fourth respondent for
modernization of pumping stations at Bombay and the fourth respondent
sub-contracted the instrumentation portion of the contract in favour of the
Company. The Company in turn has placed
order with M/s Schneider Electronic India Limited (“SCIL”) for supply of
components to implement the project on the understanding that all the payments
from the fourth respondent would be made to the Company account with the third
respondent, being its Banker. In this
connection, Shri Balasubramanian referred to a Power of Attorney dated
09.03.2000 (page 17 of typed set of documents by R-1) executed by the Company,
relating to supply of bills on the fourth respondent, empowering the third
respondent to obtain cheques for sums payable to the Company directly in its
own name from the fourth respondent and to cash the same and to receive the
amount thereof and appropriate such receipts towards the dues of the
Company. By virtue of this Power of
Attorney, the third respondent is entitled to realize the amount of the bills
direct from the fourth respondent and the remittance of such bills would be
made direct by the fourth respondent to and in the name of the fourth
respondent. However, at the instance of
the first respondent the third respondent had advised the fourth respondent to
pay Rs.32 lakhs directly to the SCIL, in pursuance of which, the fourth
respondent remitted Rs.32 lakhs to SCIL on 29.10.2000. According to Shri Balasubramanian, the
Company has been deprived of Rs.32 lakhs on account of the direct payment by
the fourth respondent to the SCIL, in contravention of the Power of Attorney
dated 09.03.2000, which amounts to
misappropriation of funds of the Company by the first respondent. He pointed out that the first respondent in
collusion with respondents 3 & 4 defrauded the Company by parting a sum of
Rs.32 lakhs in favour of the SCIL. In
spite of the objection raised by the petitioner in his letter dated 27.09.2000
(A-2) the third respondent advised the fourth respondent to make direct payment
in favour of the supplier. Moreover,
the fourth respondent disregarded the stop payment instructions of the third
respondent enabling the SCIL to encash the cheque of Rs.30,10,000/-. These developments clearly show that the
fourth respondent colluded with the first respondent in making direct payment
in favour of the supplier instead of routing the payment through the third
respondent. He further pointed out that
quantities supplied by SCIL to the fourth respondent are in excess of quantity
required in execution of the contract resulting in a loss of Rs.11.50 lakhs to
the Company. The first respondent
arranged to cancel the order placed with the Company by the fourth respondent
unilaterally and diverted the said order to his new firm, viz., Sun Industrial
Automation and Solutions, in which the second respondent is the managing
partner, thereby the Company has incurred a loss of Rs.20 lakhs. The first respondent has removed the stocks
and assets belonging to the Company worth about Rs.51.73 lakhs, which have been
hypothecated in favour of the third respondent and in order to safeguard the
remaining hypothecated assets, the petitioner took custody of the assets under
intimation to the third respondent. In
this connection, he referred to the correspondence exchanged between the
parties. The first respondent has
prevented the petitioner from entering the factory premises as also the
registered office and removed statutory records and books of accounts of the
Company. The first respondent is
neither holding the Board and annual general meetings, nor filing statutory
returns and income tax returns. He
further pointed out that the Company had advanced Rs.1.2 lakhs to M/s Enclotec
Panels, Bangalore (“EP”) towards purchase of panels for the Bombay Municipal
Corporation project. The order placed
with EP has been diverted by the first respondent to his firm and failed to
take steps to recover the advance amount paid by the Company to EP, thereby
misappropriated the funds of the Company to the tune of Rs.1.2 lakhs.
Shri Balasubramanian concluded his submissions seeking the
following reliefs: -
(i)
to direct the first respondent
to deposit Rs.104.94 lakhs with the third respondent towards the losses
suffered on account of the conduct of first respondent;
(ii)
to direct the first respondent
to comply with statutory formalities with various authorities and finalise the
accounts of the Company;
(iii)
to direct the first respondent
to take over the bank liabilities;
(iv)
to investigate the affairs of
the Company; and
(v)
to direct the fourth
respondent to deposit a sum of Rs.32 lakhs with the third respondent; and
(vi)
to direct the third respondent
to withdraw the recovery proceedings initiated before the Debts Recovery
Tribunal.
4. Shri
V.Ramasubramanian, Advocate for the first respondent while denying the charges
leveled by the petitioner has raised the following preliminary objections: -
a.
The petitioner and his wife
together hold 50 per cent of the equity shares and the first respondent with
his wife hold the remaining 50 per cent of the equity shares. The petitioner is not in minority and cannot
invoke the provisions of section 397 and 398.
b.
The third respondent has
already initiated recovery proceedings against the Company under the Recovery
of Debts due to Banks and Financial Institutions Act, 1993 for recovery of the
outstanding amount. The prayer of the
petitioner for a direction against the third respondent to withdraw the DRT
proceedings is barred by virtue of the provisions of section 18 of the said
Act.
According to Shri Ramasubramanian the petitioner was not
cooperating with the first respondent for timely completion of the contract
entered with the fourth respondent for supply of telemetry system for the
Bombay Municipal Corporation. He pointed
out that the contract consisted of two parts, namely, (a) programming,
supplying and commissioning of RTU and associated system and (b) supply of
standard products. While the first
part of the work was taken care of by the first respondent, the second part was
attended to by the petitioner. However,
the petitioner failed to execute his portion of the order both in terms of time
schedule and of quality. In this
connection, Shri Ramasubramanian referred to a letter dated 08.09.2000
(Annexure-1 enclosed to counter) of the fourth respondent addressed to the
Company, wherein the fourth respondent expressed its total dissatisfaction at
the lack of coordination on the part of the petitioner and the failure of the
petitioner even to respond the phone calls. However, the petitioner without executing the order within the
committed schedule, closed the operations in the factory on 08.09.2000 by
forcing technical personnel to resign and taking away the materials. In the circumstances,
the fourth respondent was constrained to accept the materials from the
Company’s supplier SCIL, who has insisted that payment should be made by the
fourth respondent directly on behalf of the Company, as borne out by a letter
dated 30.08.2000 (Annexure-2 of the Counter by R-1) of SCIL addressed to the
Company, wherein SCIL expressed its willingness to dispatch the materials based
on the direct assurance from fourth respondent that the payment would be made
directly to SCIL. In the meanwhile, the
third respondent by its letter 31.08.2000 (page 23 of counter of R-3) at the
instance of the first respondent permitted the fourth respondent to pay 80 per
cent of invoice value to SCIL and the balance of 20 per cent in favour of the
third respondent. In this connection,
Shri Ramasubramanian pointed out that the petitioner had given such
instructions singularly to the third respondent to make direct payment to
suppliers, in support of which he referred to the instructions of the
petitioner at Annexure (vi) enclosed to counter of R-1. Moreover, the Company has not suffered any
losses by direct payment made in favour of its supplier especially when the
Company still owes money to the supplier.
The first respondent was compelled to float a new firm in the month of
June 2000 with the knowledge of the petitioner on the account of the utter
non-cooperation by the petitioner to execute the order entered into by the
Company. The first respondent’s new
firm never took up the project, which were intended for the Company and never
competed with the Company to bag any contract. The contract made with the fourth respondent in relation to BMC
project ought to have been completed by March 2000, which was unduly delayed at
the instance of the petitioner, resulting in cancellation of the contract by
the fourth respondent. The first
respondent cannot be held responsible for cancellation of the contract by the
fourth respondent. The petitioner
failed to extend his cooperation in timely completion of projects in spite of
the efforts made by the first respondent.
However, the petitioner stealthily removed away all the valuable items,
assets and stock of the Company on 08.09.2000 worth about Rs.76.73 lakhs, made
many employees to resign, thereby the Company could not execute any work. The petitioner failed to settle the claim of
EP for the panels supplied by them, which forced EP to take away the panels
transferred by them. The second
respondent cannot be held responsible for non-refund of deposit amount by EP
for which the Company should initiate steps for recovery of the same. According to Shri Ramasubramanian, the first
respondent never removed the stocks and assets as claimed by the
petitioner. The petitioner did not
cooperate with the first respondent for compliance of the statutory
requirements. The first respondent
cannot be blamed for such non-compliance even after the disputes between the
parties, the first respondent took every effort in realization of the
receivables due to the Company and in fact realized a sum of Rs.6,58,015/- due
to the Company and remitted the same to the third respondent. Shri Ramasubramanian, while concluding his
arguments, has submitted that it is only on account of the independent attitude
of the petitioner and his non-cooperation, the Company was forced to close its
business and that the first respondent is in no way responsible for the present
state of affairs of the Company. He,
therefore, sought for dismissal of the petition.
5.
Shri K.S.Sundar, Advocate for
the third respondent has while denying the charges leveled against the third
respondent has submitted that the Company obtained sub-contracts for
instrumentation from the fourth respondent and that the Company placed
consequential order on SCIL and that the finished products were to be supplied
by SCIL directly to Bombay Municipal Corporation. As per the arrangement between the parties, the Company would get
payment from the fourth respondent and pay SCIL to enable them to supply the
materials to the Bombay Municipal Corporation.
The Company is enjoying credit facilities with the third respondent
while enjoying the facilities, the Company had executed a power of attorney
empowering the third respondent to collect the payments due from the fourth
respondent. However, at the request of
the first respondent in his letter dated 25.08.2000 (Annexure-6 enclosed to
counter filed by R-3), the third respondent permitted the fourth respondent to
make the payment due to the Company directly to SCIL. This was conceded to by the fourth respondent in order to avoid
the delay in lifting the materials by the fourth respondent from SCIL and
accordingly the third respondent by its letter dated 31.08.2000 (Annexure-14 of
counter filed by R-3) permitted the fourth respondent to make payment of 80 per
cent of the invoice value to SCIL and the balance in its favour on account of
the Company. When the petitioner
requested the third respondent on 27.09.2000 (Annexure A-10 of counter by R-3)
not to permit direct payment in favour of the SCIL, the third respondent
immediately advised the fourth respondent to stop direct payment. However, it transpired that the fourth
respondent had already released the payment and the SCIL realized the amount,
for which the third respondent cannot be in any way found fault. As the petitioner and the first respondent
removed the stock and assets hypothecated to the third respondent, the third
respondent initiated proceedings before the Debt Recovery Tribunal for recovery
of the outstanding amount due to the third respondent. The petitioner has approached the CLB in
order to thwart the DRT proceedings already initiated by the third
respondent. The petitioner cannot claim
any relief against the third respondent and the petition is liable to be
dismissed.
6.
Shri R.Murari, Advocate for
the fourth respondent while denying the plea of collusion against the fourth
respondent has submitted that the relief sought in the petition against this
respondent is beyond the scope of the section 397 and 398. Shri Murari pointed out that the fourth
respondent had already made payment to SCIL on the advice of the third
respondent and that the fourth respondent cannot be any way liable for the
inter-se dispute between the petitioner and the first respondent. He further pointed out that the Company
ought to have executed and completed the contract in March, 2000, but failed to
execute the same within the agreed time, forcing the fourth respondent to
cancel the contract in terms of clause 22 of the agreement entered between the
Company and the fourth respondent (page 13 of Typed set of documents by R-1) to
avoid the damages which may be levied by the Bombay Municipal Corporation
against the fourth respondent. The
fourth respondent on the authority of the third respondent made payment of a sum
of Rs.30,10,000/- on 28.09.2000 to SCIL which cannot be questioned by the
petitioner at this stage. Though the
third respondent later stopped direct payment in favour of SCIL, the fourth
respondent could not comply with the instruction, by the time payment had
already been made in favour of SCIL. In
these circumstances, the fourth respondent cannot in any way made liable to pay
any sum to the petitioner and that no relief can be granted. Shri Murari, therefore, prayed for dismissal
of the petition.
7.
We have considered the
pleadings and arguments of learned Counsel for the petitioner as well
respondents. The question that arises
for our consideration is whether the alleged acts of oppression and
mismanagement in the affairs of the Company against the respondents would
warrant our interference to grant reliefs sought in the petition. A careful perusal of the records made
available before us reveal that the fourth respondent in the regular course of
business had placed purchase orders from time to time on the Company for supply
of certain instruments in execution of the Bombay Municipal Corporation
project, Mumbai and one such purchase order for supply of digital panel meters
was placed by the fourth respondent on 08.12.1999 as borne out by the purchase
order dated 08.12.1999 of the fourth respondent (page 1 of typed set of
documents by R-1). The purchase order
was to be completed by March, 2000. The
annexure to the purchase order (pages 4 to 14 of typed set of documents by R-1)
contains detailed terms and conditions for supply of digital panel meters by
the Company. SCIL was to supply
components to the Company for completion of the purchase order by the
latter. In the course of execution of
the purchase order, the Company had executed a Power of Attorney dated
09.03.2000 (pages 17 & 18 of typed set of documents by R-1) authorizing the
third respondent to realize the amount of bills directly from the buyers and
the remittance of such bills would be made direct by the fourth respondent in
favour of the third respondent. The
Company could not supply the materials to the fourth respondent within the
stipulated time on account of the disputes which arose between the petitioner
and the first respondent. SCIL had
insisted payment before supply of the components in view of the delayed payment
on the part of the Company and it is on record that SCIL in its letter dated
28.07.2000 (page 10 of counter by R-3) advised the Company that it would not
dispatch any materials until the Company honours all the pending post-dated
cheques given to it aggregating over Rs.30 lakhs. SCIL by its letter dated 24.08.2000 (page 11 of counter by R-3)
reiterated its stand and demanded the payment from the Company. SCIL by its letter dated 30.08.2000 (page 12
of counter by R-3) further advised the Company that it would dispatch the
materials provided the fourth respondent makes payment directly in its
favour. The first respondent by its
letter dated 25.08.2000 (page 8 of counter by R-3) made a request to the third
respondent to permit the fourth respondent to pay directly a sum of
Rs.30,08.746 to SCIL representing 80 per cent of the invoice value and the
balance of the invoice amount in favour of the third respondent. Considering the request of the Company, the
third respondent by its letter dated 31.08.2000 (page 23 of counter by R-3)
advised the fourth respondent to pay 80 per cent of the invoice value directly
to SCIL and balance payment of 20 per cent in favour of the third respondent,
upon which the fourth respondent by its letter dated 12.09.2000 (page 13 of
counter of R-3) conveyed its acceptance to pay a sum of Rs.30,10,000 in favour
of SCIL on receipt of the materials and endorsed a copy of its letter to the
Company. The flow of events clearly
indicate that SCIL was insisting payment by the Company before supply of the
materials, driving the first respondent to approach the third respondent to
authorize the fourth respondent to make direct payment in favour of SCIL which
was ultimately conceded to by the fourth respondent. Accordingly, the fourth respondent while according its consent to
make direct payment, has kept informed the Company, but the petitioner has not
objected to this arrangement till 27.09.2000. Admittedly the petitioner was
having access to the registered office of the Company till just before 25.09.2000,
as seen from Annexure-12 (Counter by R-3), but failed to explain the reason for
this delay. At this juncture, it is
relevant to observe that after the direct payment made by the fourth respondent
on 28.09.2000 in favour of SCIL, a cheque dated 29.10.2000 for Rs.9,47,928 was
said to have been issued jointly by the petitioner and the first respondent in
favour of SCIL, as revealed from the letter dated 18.11.2000 (Annexure-11) of
the third respondent, which has not been dispatched by the petitioner. It is further observed from the letters
dated 06.03.2000 (page 31), 23.05.2000 (page 34) dated 06.06.2000 (page 37)
06.07.2000 (Page 40) and 27.07.2000 (page 43) at Annexure (vi) series of
counter by R-1, petitioner was authorizing the third respondent from time to
time singularly to debit the current account of the Company in order to make
payment to the suppliers. We are,
therefore, convinced that the fourth respondent made the payment of
Rs.30,10,000/- directly in favour of SCIL in the usual course of business. Moreover, by virtue of this direct payment,
the petitioner has failed to establish whether the Company has incurred any
loss, in the absence of which it cannot amount to an act of oppression on the
part of the respondents.
8.
In regard to the plea of
diversion of business of the Company to the new firm floated by the first
respondent, it is on record that the first respondent has floated a partnership
firm in June, 2000. The purchase order
awarded by the fourth respondent was to be executed by March, 2000 which was
not duly completed by the Company within the stipulated time. In view of breach of the terms and
conditions of the contract between the parties, the fourth respondent had
terminated the purchase order placed with the Company by its letter dated
15.09.2000 (page 20 of typed set of documents by R-1). Though the petitioner had knowledge of the
first respondent’s new business even in June 2000, he objected for the same
only in October 2000 (Annexure-9), when the disputes arose between the parties. Admittedly, the Company ceased to carry on
business since first week of September, 2000 and all the employees have also
left the Company. In these circumstances, the plea that the first respondent
has diverted the business of the Company to his new firm has no force. Mere failure to recover the outstanding
amount due from EP can neither amount
to misappropriation of the funds of the Company nor diversion of business on
the part of the first respondent.
9.
While, according to the
petitioner the respondents have removed stealthily the stock and assets of the
Company to the tune of Rs. 51.73 lakhs, it is contended by the first respondent
that the petitioner has unlawfully removed the stocks worth about Rs.76.73
lakhs. Admittedly, both the petitioner and first respondent took away the
stocks and assets of the Company by entering the particulars in a common
register (Annexure-2 in rejoinder), which according to the petitioner is in the
custody of the respondent, but which according to the first respondent is with
the petitioner. The claim and
counter-claim of the parties in regard to removal of the stock and assets of
the Company, neither of the parties has substantiated the same, in the absence
of which we will not be able to adjudicate the issue. In regard to the other allegations that the first respondent has
not complied with the statutory obligations and failed to call for annual
general meeting and board meeting of the Company, it may be observed that the
Company is already closed and is not functioning. The statutory authority will take appropriate steps for such
non-compliance. On our over-all
assessment of the facts of this case, it is apparent that both the shareholders
had decided to close down the business of the Company by taking away the assets
as seen from page 24 (Annexure-5) of Petition and page 44 (Annexure VII) of
Counter of R-1. This happened in
September, 2000. However, this petition
was filed only in March, 2002. There is no explanation for the delay in filing
this petition. It is on record that the
third respondent initiated proceedings before the DRT in early 2001 and this
petition was filed thereafter in March 2002 with a specific prayer to stop DRT
proceedings. Thus, this petition appears
to be a motivated one and as such deserves to be dismissed and accordingly it
is dismissed.
No order as to costs.
(K.K.
BALU) (S.
BALASUBRAMANIAN)
Dated this the 16th
day of December, 2002