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 GULF OLEFINES
PRIVATE LIMITED
PETITIONERS:
1. M.M. Subrahmanyam
2. M.S. Prakash
3. T. Indira
4. M.S. Meenakshi
5. R. Rajalakshmi
RESPONDENTS:
1. Gulf Olefines Private Limited
2. M.S. Rajaram
3. M. Girija Rajaram
4. M. Krishna Mohan
5. M. Padmapriya
6. M. Venkataraman
7. S.K. Jena
8. R. Kalyanaraman
9. J. Lawrence Imbaraj
10. R. Srinivasan
11. R. Pattabhiraman
PRESENT ON BEHALF OF PARTIES:
1. Shri A.K.Mylsamy, Advocate … for
Petitioners.
2. Shri C.Harikrishnan, Senior Advocate … for
Respondents.
3. Shri H. Karthik Seshadri … for
Respondents.
4. Smt. Elizabath Seshadri … for
Respondents.
(DATE OF FINAL HEARING: 7.6.2001)
K.K. BALU:
1.
The
petitioners holding more than 10 per cent of the paid-up capital in M/s Gulf
Olefines Private Limited (“the Company”) as well as constituting more than
one-tenth of the total number of members have filed this petition under Section
397/398 of the Companies Act, 1956 (“the Act”) alleging various acts of
oppression and mismanagement in the affairs of the Company.
2.
The
main acts of oppression and mismanagement relate to non-convening and holding
of the meetings of Board of directors and general body of the Company,
cessation of petitioners 1 & 2 as directors of the Company, illegal
co-option of respondents 3 to 5 as directors, illegal allotment of the impugned
shares in favour of respondents 2 to 11, violation of various provisions of the
Central Excise Act and rules made thereunder, siphoning off funds of the
Company and encumbering the Company’s properties without authority of the Board
of directors and without deriving any benefit for the Company.
3.
Shri
A.K.Mylsamy, Advocate appearing for the petitioners, while initiating his
arguments submitted that the petitioners as well as respondents 2 to 5 are
belonging to the same family related to each other. The petitioners were holding 74 per cent of the paid-up share
capital and the respondents group 25.99 per cent. The Company is a family
company, each member looking after one company separately in exclusion of the
other family members and without interference by any of them. The second
respondent was looking after the day-to-day management of the Company since its
incorporation till August 1995.
However, the second respondent was not convening and holding the
meetings of the Board and general body for more than a decade in spite of the
repeated requests made in writing by the first petitioner. The second respondent while corresponding
with the first petitioner had stealthily recorded the proceedings as if the
petitioners 1 & 2 had ceased to be directors of the Company with effect
from 21.2.96 on the ground that they had failed to attend three consecutive
meetings of the Board, thereby vacating the office as directors under Section
283(1)(g) of the Act. In this
connection, Shri Mylsamy drew our attention to the Directors’ Report for the
year ended 31.3.96 (Annexure A-14) to show that the petitioners ceased to be
directors with effect from 21.2.96 by virtue of Section 283(1)(g) and that the
second respondent, the lone Director co-opted the third respondent on 21.2.96
as a director, which is not valid in law.
However, the second respondent failed to take this stand in his various
correspondences with the first petitioner.
In this connection, Shri Mylsamy referred to Annexure A-2 to A-8; A-10,
A-18 to A-22 exchanged between the first petitioner and second respondent. No notices were sent to the petitioners for
any of the Board meetings said to have been convened by the second
respondent. The certificates of posting
for having sent notices for the Board as well as general meetings are all
fabricated. It is not safe to rely upon
the certificates of posting. No Board
meetings were ever conducted by the second respondent. In the circumstances, the petitioners 1
& 2 could not have ceased to be directors of the Company by virtue of
Section 283(1)(g). The petitioners
never received any intimation from the second respondent that they ceased to be
directors of the Company. Consequently,
co-option of the third respondent as director on 21.02.96 and appointment of
respondents 4 & 5 as directors on 22.02.96 without notice to the
petitioners and without quorum cannot be valid. According to Shri Mylsamy, quorum is absolutely required even at
an adjourned meeting of the Board of directors under Section 288 and even at
the adjourned meeting, if there was no quorum, the meeting stands cancelled and
no business can be transacted. In this
connection, he relied upon (1995) 3 CLJ 418(Raj) Maharani Yogeswari Kumari Vs. Lake
Shore Palace Hotel (P) Ltd to show that an adjourned meeting without quorum is
not permissible under the Companies Act.
He further
referred to Article 91 of the Articles to show that when the number of
directors is reduced below the number fixed by the Articles, the continuing
directors may act for the purpose of increasing the number of directors and
pointed out the difference in language between Article 91 and Regulation 75
contained in Schedule I, Table-A of the Act.
While Article 91 empowers the continuing directors, Regulation 75 uses
the words “the continuing directors or director”. The only situation contemplated in Table ‘A’ to the Act is that
if the number is reduced below the quorum fixed under the Act for a meeting of
the Board and vacancy in the Board, the only member present in the meeting can
co-opt a director. In the instant case,
co-option of the third respondent by the second respondent is not proper and
illegal. The Board consists of 3
directors, and two of them are petitioners 1 & 2. The second respondent alone will not constitute quorum. In view of this, the second respondent could
not have co-opted the third respondent as a director and all proceedings held
on or after 21.02.1996, wherein third respondent participated are null and
void. He further pointed out that
meeting of the Board of directors without notice to directors is not valid as
has been held in (1974) 44 CC 1 (SC) Parmeshwari Prasad Gupta Vs. UOI. It is for the same reason, Shri Mylsamy submitted
that the allotment of the impugned shares, 55,000 shares on 02.03.1996, 21,000
shares on 23.05.1996 to respondents 2 to 5 and 600 shares on 24.05.1996 to
respondents 6 to 11, employees of the Company in favour of respondents 2 to 11
are also illegal. Even according to the
respondents at para 14 of counter the impugned allotments were made for sentimental
reasons which deserve to be set aside.
The allotments are not in the interest of either the shareholders or the
Company. The object of the allotments
is to reduce the petitioners’ holding from the existing majority. No additional
funds were generated by the allotment of impugned shares. The respondents have produced only an
extract from the ledger maintained by the Company disclosing cash payments and
not any bank statement. The Company
ought to have sold its assets to discharge its liabilities instead of
augmenting funds by allotment of shares to settle the creditors. The cash payment in favour of the sundry
creditors is fictitious. No document
has been produced giving particulars of the sundry creditors. Moreover, the second respondent ought to
have utilized the sale proceeds of the plant and machinery belonging to the
Company amounting to Rs.23,50,000 in discharge of the liability for the sundry
creditors, if any. The Company has
closed its business as early as in the year 1992 and there was, therefore, no
necessity to raise the capital and make any further allotment, which should be
set aside. Shri Mylsamy further pointed
out that the second respondent was encumbering the properties belonging to the
Company in favour of third parties for availing facilities for his own company,
M/s Archana Spinners Private Limited from time to time without approval of the
petitioners and without any benefit whatsoever to the Company. The second respondent, during his tenure as
the Managing Director, has acted in violation of the provisions of the Central
Excise Act. The second respondent had
never placed the accounts of the Company before the shareholders. He has been indulging in malpractices and
diverted the Company’s funds for allotting shares to himself and his associates
in other companies. The acts of the
respondents are detrimental to the interests of the Company. Shri Mylsamy, therefore, prayed for the
reliefs sought in the petition.
4.
Shri
C.Harikrishnan, Senior Advocate appearing for the respondents while denying the
charges levelled by the petitioners has submitted that the petitioners’ main
grievances are that the respondents have failed to convene and hold Board
meetings as well as general meetings of the Company. He further pointed out that the alleged main acts of oppression
are (i) cessation of directorship of the petitioners for not attending the
Board meeting consecutively three times thereby earning disqualification under
Section 283(1)(g) of the Act; (ii) illegal appointment of directors (iii)
allotment of the impugned shares in favour of the respondents group thereby
reducing the petitioners into a minority.
The acts of mismanagement relate to furnishing the assets of the Company
by way of security for the loan secured by third party company, wherein the
second respondent is holding majority of the shares. According to the averments made at para (vi)(2)(5) of the
petition, the Company is a family company, each member looking after one company
separately in exclusion of the other family members and without interference by
any of them. The petitioners were
allotted shares out of sentimental reasons, though they had not contributed for
the shares. The second respondent has
been managing the affairs of the present company. In the process of running the various business, the petitioners
as well as respondents have entered into a family arrangement in the year 1984
which according to the petitioners, the second respondent failed to implement
the said family arrangement. He
categorically stated that the first petitioner eliminated his other brothers
from the business and that now attempting to eliminate sons of other brothers
by resorting to the present Company Petition.
5. Shri Harikrishnan recapitulating
in a nutshell the salient features of provisions of Section 397 has pointed out
that the provisions of Section 397 would be attracted if the acts of parties
would prejudice the public interest and cause oppression to any member. These two ingredients are essential to
invoke any relief under Section 397. He
further referred to the recent Apex Court judgement in Hanuman Prasad
Bagri Vs. Bagri Cereals (P) Ltd. (2001) 2 CLJ 392 – to show that all the conditions
of winding-up should be present, but at the same time the Company should not be
wound-up, as it would adversely affect the interests of the members. The main object of Section 397 is that the Company
should continue to exist and the matter complained of should be brought to
end. According to Shri Harikrishnan,
the facts and circumstances of the present case do not meet the requirements of
Section 397. Shri Harikrishnan relying
upon the principles enunciated by the apex court in Needle Industries has submitted that acts of the
Company, though illegal need not be struck down, especially when they are in
the interest of the Company. He
emphasized that all illegal acts need not be interfered by the CLB, while legal
acts may amount to acts of oppression against minority of the shareholders. He further pointed out mere violation in
isolation is not adequate to grant relief under Section 397. The pleadings are always essential which
cannot be enlarged without stating in the petition. The allegations that the second respondent has not been holding
Board meetings or general meetings and that the second respondent is not
looking after the interests of shareholders do not amount to an act of
oppression, especially when no prejudice has been caused to the shareholders on
account of inaction on the part of the second respondent. The Registrar of Companies has neither
initiated action for any violation. The
petitioners have not been adversely affected on account of increase of paid up
share capital or allotment of the impugned shares or co-option of the respondents
as directors. The petitioners do not
repose confidence upon the second respondent.
The first petitioner had advised the second respondent by Annexure A-21
to close down the unit of the Company.
The Company has been closed as early as in 1992 and there has been no
income from the business of the Company.
By virtue of closure of the Company, the liabilities of the members is
minimized. According to Shri
Harikrishnan in case of a family company, compliance with the provisions of the
Companies Act can be ignored as has been held in Indag Guarantee Company Limited. Even if there are violations he emphasized that such
violations can be ignored. All the
correspondence relied by the petitioners show that the second respondent did
not implement the oral arrangement entered between the family members. Many of the letters written by the first
petitioner are in his personal capacity as father to the son and not as a
shareholder. The first petitioner has
asserted his position as father and not as a shareholder. He further pointed out that no other member
has ever raised any objection against the second respondent. The letter dated 2.8.96 (Annexure R-36)
brings out the real mind of the first petitioner. Even, according to the petitioners, no meetings were held for
more than a decade, but at the same time no action was initiated by any member
at any point of time for convening and holding of meetings. The first petitioner has always ensured that
his words as father should be carried out by the second respondent, being the
son. The petitioners neither evinced
any interest in the business of the Company nor complained since 1992. None of the directors from the petitioners’
group were attending the Board meetings on account of the huge liabilities incurred
by the Company. On the other hand, the
second respondent cleared all the liabilities of the Company and saved the
Company’s assets. In the process, the
second respondent was constrained to file civil suits against the first
petitioner, which resulted in filing of the present Company Petition by the
petitioners. In regard to encumbering
the Company’s immovable properties, he pointed out that it was resorted to by
the Company to meet the expenses incurred in connection with the machinery of
the Company, before which the alteration to Articles were duly approved by the
Company Law Board and in this connection he placed reliance on Annexure
R-7. Shri Harikrishnan pointed out that
notices were sent by the Company by certificates of posting for the three Board
meetings as borne out by Annexures R-5, R-6, R-9, R-10, R-12, R-13, R-15, R-16,
R-19, R-20, R-22, R-23, R-26 & R-27 and that the notices cannot be
concocted on all the occasions. In this
connection, he relied upon AIR 1966 Calcutta – to show that one cannot doubt
sending notices by certificate of posting on all five occasions. Relying on Parmanand Choudhary And Others Vs. Smt.
Shukla Devi Mishra And Others (1990) CC Page 45, he pointed out that directors failing to attend three consecutive
meetings ceased to be director. He
further relied on Energy Tobacco to support his contentions that when there are only
two members in a Board meeting and when one is not attending, the other lone
member can conduct the meeting. He also
made a reference to Article 91 & 92 to support his view that the continuing
director is empowered to co-opt directors.
Accordingly, the second respondent co-opted the respondent 3 as Director
of the Company. He, therefore,
submitted that there is no illegality in appointing respondents 4 to 5 as
directors. He further referred to the
list of creditors signed by the second petitioner, which was given to the bank
and the CLB in Section 17 proceedings (R-7 at Page 67). There is nothing illegal to pay the
creditors in cash. These entries are
not denied by the petitioners in their reply and all the accounts are audited
by the Chartered Accountants. Shri
Harikrishnan, while summing up his arguments has pointed out the circumstances
enumerated by Palmer and Grover, where corporate veil of the legal entities has
to be lifted to meet the ends of justice.
Under Indian Law, corporate veil is to be lifted in appropriate
cases. In the present petitions, (i.e.)
CP No.66, 67 & 68, the corporate bodies are family companies, with
shareholders being partners in business and the CLB should apply liberally the
just and equitable principles. The CLB
should consider the disputes among the family members of different companies in
various company petitions in entirety and order amicable division of properties
among them to give a quietous to the disputes as has been held in (1997) 1 CLJ
268 (CLB) – Vijay Krishan Jaidka & Others Vs. Jaidka Motor Co. Ltd.
6. We have considered the pleadings and arguments of the
learned Counsel for the petitioners as well as respondents. The question that arises for our
consideration is whether the alleged acts of oppression and mismanagement in
the affairs of the Company warrant interference of this Bench to grant the
reliefs sought in the petition.
7. Though this petition was heard on 07.06.2001, we did not issue
the order in view of pendency of a connected company petition in CP
No.3/2001. As CP No.3/2001 has been
finally heard now, the following order is made in this present petition.
8. Before considering the merits of the petition, it is
relevant to observe that the petitioners and the respondents 2 to 5 are lineal
descendents of the deceased M.R.Mannar Aiyah, for whose benefits, the Company
was incorporated in the year 1971. The
Company consists of the family members as shareholders indicating clearly that
it is a family company to be managed for the benefit of all family
members. The first petitioner and his
son, the second respondent are the subscribers to the Memorandum and Articles
of Association of the Company, who have been named under the Articles as the
directors apart from two other family members.
The second respondent has been in control of the Company as its Managing
Director. At present the Company is not
carrying any activity. The present
petition is on account of the differences which arose between the family
members of the deceased M.R.Mannar Aiyah.
Against this background, we proceed to consider the contentious issues
raised by the parties.
9. The main acts of oppression and mismanagement are in
relation to non-holding of Board meetings and general meetings, cessation of
petitioners 1 & 2 as directors, illegal co-option of respondents 3 to 5 as
directors, illegal allotment of the impugned shares, investment of funds of the
Company and encumbering its assets without authority of the Board. The petitioners and respondents 2 to 5 are
related to each other. The records
produced before us reveal the following :
·
The first petitioner by a
letter dated 11.11.1995 (Annexure A-2) addressed to the second respondent
suggested that the activities of the Company must be discussed by the
shareholders.
·
The
letter dated 11.11.1995 (Annexure A-2) was followed by a reminder letter dated
16.02.1996 (Annexure A-3) requesting the second respondent to sort out the
differences by mutual discussions and convene a meeting of the shareholders.
·
The
first petitioner had sent letters on 25.02.1996 (Annexure A-4); 29.04.1996
(Annexure A-5); 16.06.1996 (Annexure A-6) and on 26.06.1996 (Annexure A-7) in
regard to the convening of meeting of the shareholders of the Company.
·
The
second respondent by a letter dated 03.07.1996 (Annexure A-8) stated that the
annual general meeting of the Company for the year ended 31.03.1996 would be
held in the first week of July or September 1996.
·
The
first petitioner by a letter dated 16.07.1996 (Annexure A-10) complained with
the second respondent that Board meetings of the Company or general meetings
were not convened for more than a decade.
·
The
first petitioner by a letter dated 24.05.1999 (Annexure A-18) requested the
Company to send him certified copies of the minutes of all the general meetings
and extraordinary general meetings of the Company held for the past six years
from 1994 to 1999.
·
The
second respondent by a letter dated 10.07.1996 (Annexure A-19) informed the
first petitioner that he would make arrangements for auditing the accounts of
the Company and that all problems be sorted out amicably and that Board
meetings and general body meetings have been regularly held.
·
The
second respondent by a letter dated 02.08.1996 (Annexure A-20) informed the
first petitioner that a Board meeting of the Company would be convened in
August 1996 and annual general meeting in September 1996.
·
The
first petitioner by a letter dated 21.08.1996 (Annexure A-21) denied that Board
meetings and general body meetings of the Company have been regularly conducted
as reported in Annexure A-19 by second respondent.
·
The
first petitioner by a letter dated 16.10.1996 (Annexure A-22) suggested to
second respondent that discussions may be limited to the family members-shareholders
to settle the disputes among themselves.
·
The
petitioners had sent on 24.07.1996 telegrams and letters on 02.08.1996
(Annexure A-24 series) making requests to convene the Board meeting.
It is evident from the foregoing that the
petitioners had been complaining about not holding the Board and general
meetings for quite sometime. Against this background the plea of the
respondents that the petitioners did not attend the Board meetings
consecutively, thereby ceasing to be directors with effect from 21.02.1996;
that the third respondent was co-opted as director on 21.02.1996; that
respondents 4 & 5 were appointed as directors on 22.02.1996; that the
impugned shares were allotted in the Board meetings held on 02.03.1996;
23.05.1996 and 24.05.1996 have to be seen.
If we do so, then it is clear that all the above acts have taken place
only to marginalize the parties. Mere production of certificates posting
without any corroboratory evidence such as the dispatch register or books of
account to show the expenditure incurred in this behalf, cannot relied to
support the claim of the respondents that Board meetings and general meetings
were regularly held. Consequently, any
resolution passed by the Board of directors after the induction of respondents
3 to 5 as directors cannot be valid.
Moreover, the respondents have not produced any documentary proof of
bringing additional funds for the impugned allotments and the actual
utilization of the funds thereof. The
impugned allotments in exclusion of the petitioner is oppressive. However, we do not propose to set aside the
impugned allotments and other actions of the Board after a period of more than
three years. The equitable remedy, in
our view, in the present circumstances is that the petitioners must be allotted
shares according to their entitlement.
Accordingly, we hereby direct that the Company shall allot additional
shares to the petitioners in proportionate to their holding within 60 days and
the petitioners will subscribe to the shares within 30 days of the offer made
by the Company and for this purpose, if the authorized capital needs to be
increased, may be accordingly increased.
Thereafter the Company will convene and
hold a meeting of the shareholders for the appointment of directors and vest
with the Board of Directors the day-to-day management of the Company and the
Board shall take such action as may be deemed fit in the interest of the
Company and its members.
10.
With
the above directions, the petition stands disposed of without however any order
as to cost.
(K.K. BALU) (S. BALASUBRAMANIAN)
Dated this the 7th day
of November, 2002