NEW DELHI
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian, Vice Chairman
In the matter of Companies
Act, 1956-Sections 397/398
AND
PETITIONER:
M/S
Gaur Securities Pvt.Ltd.
RESPONDENTS:
1. M/S Krystal Stone Exports
Limited
2. Shri B.D. Agarwal
3. Mrs. Sangeeta Agarwal
4. Shri Rajiv Agarwal
5. Shri Liladhar Agarwal
6. Shri Mahendra Goyal
7. Shri Subhash Jain
8. Shri Jethmal Agarwal
9. Shri Lathulal Jain
Present on behalf of
parties:
1. Shri Ramesh Singh, Advocate
.. for petitioner
2. Ms. Bina Gupta, Advocate
.. for petitioner
3. Ms. Vanita Bhargava, Advocate ..
for petitioner
4. Shri U.P. Mathur, Advocate
.. for respondents
5. Shri D.D. Pande, Advocate
.. for respondents
(Date of hearing: 31.5.2002)
S. BALASUBRAMANIAN:
1. The main complaints of the
petitioner in respect of the affairs of M/S Krystal Stones Exports Limited ( the company )
are that shares have been allotted to the petitioner without its applying for the same,
that no Board Meetings and General Body Meetings are being held, that the respondents 2 to
5 have failed to comply with the terms of Equity Subscription Agreement, that further
shares had been issued without the knowledge and consent of the petitioner to the 8th
respondent. With these allegations, the petitioner has sought for a declaration that the
allotment of shares to the 8th respondent is null and void as also the
allotment of shares to the petitioner without its applying for the same for supercession
of the Board, for directions to the company to appoint
nominees of the petitioner as
directors and for giving directions to the company to hold AGMs and meetings of the
directors on regular basis.
2. The facts of the case are
that the company was incorporated in May, 1995 by respondents 2 to 5 with an authorized
capital of 27,00,000 equity shares of Rs.10/-each. The
company is having a export oriental unit for manufacture and export of various kinds of
products made of stones alike granite and marbles etc. IDBI has provided project finance
for setting up of this unit. According to the petitioner, since the company could not
mobilize sufficient funds for setting up of the project, respondents 2 to 5 approached the
petitioner for finance and accordingly the petitioner agreed to invest Rs.75 lacs in the
equity capital of the company. Accordingly, an Equity Subscription Agreement was entered
into between the petitioner and the company on 15.7.1998.
In terms of this agreement, the petitioner was to invest Rs.45 lacs immediately and
the balance Rs.30 lacs within a period of 6
months. It also provided that the company
would make public issue and get the shares listed within a period of 3 years and that in
case such listing did not come through within a period of 3 years, the promoters would buy
back the shares held by the petitioner on certain terms as indicated in the agreement. According to this agreement, the promoters were to
pledge shares worth Rs 46 lacs with the petitioner and the petitioner would have the right
to appoint two directors including one whole time
director. It further provided that no further
shares would be issued without the approval of the petitioner. The petitioner was entitled to demand and receive
various reports including the minutes of the Board and general Body meetings. Some of the terms of this agreement were to be
incorporated in the Articles of the company.
3. The learned counsel for the
petitioner submitted: The respondents are guilty of fraudulent oppression and mismanagement. When the IDBI stipulated that
the promoters should arrange for Rs.117 lacs towards the project, the promoter respondents
approached the petitioner for investment of Rs.75 lacs by giving a rosy picture about the
project and accordingly with the approval of IDBI, Equity Subscription Agreement was
entered into between the petitioner and the company on 15.7.98. In pursuance to this
agreement, the petitioner invested a sum of Rs 45 lacs on 24.7.98 and nominated Mrs Karina Batra as a director. Her appointment as
an additional director was approved in a Board meeting on 9.7.98 and this appointment was communicated to IDBI by the
company by a letter dated 14.7.98 (Annexure 7). However,
no notice for any Board Meeting was received by the nominee directors. Even though many of the terms of the Agreement
were to be incorporated in the Articles, the respondents/the company had failed to do so.
As per the understanding the petitioner was to have the control of 1/3rd of the
equity shares in the company comprising of Rs.45 lacs of the shares subscribed by it and
another Rs.45 lacs worth shares pledged by the promoters with the petitioner. Since the company had failed, in spite of repeated
demands of the petitioner to provide for various details on the performance of the
company, the petitioner did not invest further Rs.30 lacs as stipulated in the agreement. However, from the Balance Sheet dated 15.1.1999
which was sent to the petitioner, it was found that the petitioner’s contribution
towards equity was shown as Rs.75 lacs. The company has taken a stand that this amount was
borrowed in the name of the petitioner and as such these shares have been allotted. The
company never informed the petitioner about this allotment. The petitioner has nothing to
do with this so called borrowing of the amount. Further, in response to the letter of the
petitioner, the company had confirmed, by a letter dated 10.4.99, that, as on that date,
the petitioner had invested Rs 45 lacs in the equity of the company (Annexure 19). This
being the case, the company could not have allotted further shares worth Rs 30 lacs
against its own borrowal from a third person to the petitioner. Therefore, the allotment of shares worth Rs.30 lacs to the
petitioner has to be declared as null and void and its name should be removed from the
Register of Members in respect of these shares.
4. The learned counsel further
submitted: By a letter dated 15.2.1999,
the petitioner voiced its concern about non intimation of the Board Meetings, failure to
provide regular sufficient information etc. It had also intimated that it would not be
possible to invest further Rs.30 lacs in the absence of detailed information of the
working of the company. In the same letter, the petitioner requested for appointment of
Shri Y.P. Batra as an alternate director to Mrs. Karina Batra to attend Board Meeting in
her absence. At the instance of the petitioner, a Board Meeting was held on 11.4.1999 and
as a matter of fact, it was the first Board
Meeting attended by the nominees of the petitioner. In that meeting, it was noted that in
earlier meetings, many of the important items, like approval of the equity subscription
agreement between the company and the petitioner had not been recorded and that allotment
of shares worth Rs.45 lacs to the petitioner had not been recorded and that the
appointment of Shri Reuben Isreal as a nominee director of the petitioner had also not
been recorded. It was decided in that meeting that all the above discrepancies should be
rectified before the next Board Meeting to be held on 25.4.1999. However, by this date, the company/respondents had
not taken any steps to rectify the records. The request of Shri Isreal for examination of
the accounts by an independent Chartered Accountant was not agreed to by the company and
as such the petitioner had been completely denied access to the accounts. It would go to show that the company is not
maintaining statutory records properly. Since the petitioner was upset with the manner in
which the affairs of the company were being managed, it expressed its desire to quit the
company in terms of the exit provisions in the agreement which was also agreed to by the
respondents as is evident from the correspondence at Annexure 25. However, in the guise of
finding a buyer of the shares, the respondents are further mismanaging the affairs of the
company. Only from the quarterly report on 31.1.1999, the petitioner came to know that the
authorized capital of the company had been increased from Rs.345 lacs to Rs.445.04 lacs. The petitioner never received any notice for the
general body meeting in which the increase in authorized capital was approved. When the
petitioner took inspection of the records of ROC Mumbai, it came to know that shares worth
Rs.55.04 lacs had been allotted to the 8th respondent who was a stranger to the
company. The provisions of Section 81 of the
Act had not been complied in allotment of further shares to the 8th respondent.
Further, this issue of fresh capital is violative of provisions of the Equity Subscription
Agreement and also Article 15 of the Articles of Association of the company. Consequent to this allotment, the
petitioner’s holding in the company has come down from 28% to 20% and such a
reduction is an act of oppression. It was
also noted that in the Annual Return as on 30.9.1998,
neither Mrs. Karina Batra or Mr. Ruben had been shown as directors of the company. It appears that the nominee directors of the
petitioner had been illegally removed from the Board.
5. The learned counsel further
submitted: As per the directions of this
Bench, the petitioner took inspection of the statutory records of the company through a
Chartered Accountant. From his report, it is
evident that the maintenance of the statutory records in the company is in chaotic
condition. Various general body meetings were allegedly
been held without quorum and decisions had been taken. Practically in all these
meetings only 4 shareholders were present as against the minimum prescribed quorum of 5
members. The respondents have not filed any
counter to the report of the Chartered Accountant, clearly establishing that they admit
the contents of the Report. For none of these meetings, even though the petitioner holds
substantial shares, it had received any
notice. Further, the Registrar of
Companies had also initiated inspection in terms of Section 209A of the Act in this
company. The IDBI has also initiated recovery proceedings against the company before Debt
Recovery Tribunal. The fact of mismanagement
by the respondents is apparent as the cost of the project has gone up substantially from
Rs.900 lacs to Rs.1125 lacs. It is also noticed that the respondents are in the habit of
siphoning of funds of the company. The 2nd respondent had withdrawn a sum of
Rs.5 lacs on 30.7.1998 and had credited the same on 3.8.1998. It is learnt that this amount was temporarily
diverted to another account for the purposes of obtaining visa to some country. This is not only misappropriation of company funds
but also fraudulent representation to a foreign embassy.
6. Summing up his arguments,
the learned counsel submitted that most of the minutes of the Board Meetings are
fabricated. While the respondents were
informing the petitioner that Board Meetings were not being regularly held, yet, the
minutes book shows recording of minutes of Board Meetings on many days. Even though the
petitioner held nearly 1/3rd shares of the company with two directors on the
Board, it was not associated with the affairs of the company. Under these circumstances,
this Bench should appoint an independent Managing Director and two of the nominees of the
petitioner to be appointed on the Board. Further,
the issue of further shares to the 8th respondent should be cancelled.
Otherwise, the respondent should be directed to be purchase the shares held by the
petitioner in terms of the buy back provision in the Equity Subscription Agreement.
7. Shri Mathur appearing for
the respondents submitted: It is a fact that to meet the requirements of IDBI that a sum
of Rs.117 lacs was to be arranged by the promoters, the petitioner company was approached
mainly on account of its claim that it had
experience in working with various international companies for marketing. Even though the
petitioner invested Rs.45 lacs initially, it failed to invest further Rs.30 lacs. Even though Mrs. Karina Batra was appointed as a
representative of the petitioner on the Board, she being away from India, did not attend
any Board Meeting nor the petitioner appointed any alternate director in her place. The
petitioner was given fortnightly reports on the progress of the project and therefore it
is wrong to say that no information was being given to the petitioner. Since IDBI was
pressing for further induction of funds, in consultation with the directors of the
petitioner, a sum of Rs.30 lacs was taken as loan from a common NRI friend viz. M/S Ary
International, Dubai on the understanding that shares worth Rs.30 lacs would be allotted
to the petitioner but shares certificates would not be issued till the petitioner repaid the loan to the NRI company. This fact was intimated to the directors of the
petitioner company and therefore the petitioner cannot claim that it was not aware of the
allotment of shares worth Rs.30 lacs. Now the petitioner is contesting this allotment only
with a view to avoid repayment of the loan taken with its consent. The purpose of the petition is to force the
respondents to buy back the shares held by the petitioner.
Even though, the respondents had agreed, to maintain good relationship with the
petitioner, to buy back the shares, yet, the petitioner demanded a premium of 50% per
shares at which neither the respondents nor any new buyer of the shares was interested.
The very fact that the petitioner decided to quit the company would indicate that the
petitioner is no longer interested to continue in the company.
8. The learned counsel further
submitted: Since the cost of the project had gone up which had also been approved by IDBI,
the company needed funds. Therefore, only
with a view to augment funds, shares were allotted to the 9th respondent who
was already a shareholder. Therefore, the
contention of the petitioner that the shares were allotted for the purpose of reducing the
percentage shareholding of the petitioner is not correct. By this allotment, the company
could mobilize nearly Rs.55 lacs. No shares were allotted to the 8th respondent
as alleged by the petitioner. As far as the allegation that no Board Meetings or AGMs were
held is concerned, the company has been holding AGMs regularly and notices were given to
the petitioner but none represented the petitioner in any of the AGMs. Since the
respondents could not purchase the shares held by the petitioner, it has not only filed
this present petition but has also complained to the ROC who has initiated the inspection
in terms of Section 209 of the Act. Since this petition has been filed with an ulterior
motive of forcing the respondents to purchase the shares held by the petitioner, this
petition should be dismissed.
9. We have considered the
pleadings and arguments of the counsel. We find substance in the complaint of the
petitioner that there had been violation of the provisions of the Act in the management of
the affairs of the company. First, even though the company is a party to the Equity
Subscription Agreement, yet, there is nothing on record to show that either prior approval
of the Board of the company was taken for entering into this Agreement or that the same
was approved subsequently. From the minutes of the Board Meeting held on 9.7.1998, we find that Mrs. Karina Batra was appointed as an
additional director and that from the minutes of the Board Meeting on 29.7.1998, we find
that shares worth Rs.45 lacs had been allotted to the petitioner. In neither of these
minutes, there is any reference to the Equity Subscription Agreement. The company could
not have entered into such an agreement without the approval of the Board. Further, we
find from the report of the Chartered Accountant who had inspected the records of the
company, that general body meetings have been held with out quorum and various businesses
have been transacted. Even though the company has averred in the reply that notices for
AGMS had been given to the petitioner, it has not produced any evidence of having done so.
Since the ROC has initiated inspection under Section 209A of the Act, we are not dealing
with these matters in detail other than noting that the complaint of the petitioner in
this regard is legitimate.
10. Most of the complaints of
the petitioner like non supply of periodical statements, non appointment of its nominees
on the Board etc relate to the terms
of the Agreement, which, as a matter of established principles, cannot be agitated in a
397/98 petition. More so in this case, as the agreement does not appear to have had the
approval of the Board of directors. Beside these allegations, the petitioner has
complained about allotment of shares worth Rs 30 lacs, on which we find that the
petitioner has legitimate grievance. In the
reply, the respondents themselves have averred that the petitioner had failed to invest
Rs. 30 lacs consequent to which the project has suffered. There is nothing on record to
establish that the petitioner had authorized the respondents to borrow money on
petitioner’s account and allot shares to it. If the shares had been allotted to the
petitioner for Rs 30 lacs prior to Jan 99 as exhibited in the Balance Sheet as on 15.1.99,
the company could not have issued the letter at Annexure - 19 indicating the investment of
the petitioner as on 10.4.99 as Rs 45 lacs. The very fact that the petitioner has not
invested Rs 30 lacs, no shares could have been allotted in its name. Therefore, the
petitioner is justified in seeking deletion of its name from the register of members in
respect of these shares and accordingly we direct the company to delete the name of the
petitioner from the register of members in respect of the shares for Rs 30 lacs within 15
days from the date of receipt of this order.
11. As far as the complaint of
the petitioner that its nominee director had not been receiving notices for the Board
meetings is concerned, the admitted position is that Mrs Karina Batra was appointed as an
additional director in the Board meeting held on 29.7.98. Being an additional director,
the petitioner should have been aware that her terms of office would come to an end at the
next ensuing AGM. There is nothing on record to show that The petitioner proposed her name
for appointment as a regular director. May be that in the absence of notice for the
general body meeting, the petitioner could not propose her name. As far as the directorship of the nominees of the
petitioner is concerned, the stand of the respondents/the company is not specific. It is on record that two Board Meetings were held
– one on 11th April, 1999 and another on 25th April, 1999
– in which the attendance of Mr. Reuben Isarel, a nominee of the petitioner is
recorded. There is nothing on record to show
when Mr. Isarel was appointed as a director. Whether Mr. Isarel continues as a director is
not clear as the Annual Report for the year ended 31st March, 2000, the list of
directors is not exhibited. Since the
petitioner is a substantial shareholder with about 20% shares in the company, we deem it
fit, that it should have one of its representative on the Board of the company and
accordingly we direct that one of the nominees of the petitioner should be taken on the
Board and the nominees shall not be liable for retirement on rotation with the liberty to
the petitioner to change its nominee at any time.
12. As far as the allotment of
shares to the 9th respondent is concerned, we note that the company being a public company, it should have followed
the provisions of Section 81 for allotment of shares which would mean allotment on
proportionate basis to the existing shareholders. There
is nothing on record to show that the general body approval was obtained in terms of
Section 81(1A) of the Act for allotment of shares to the 9th respondent. However, it
is obvious from the financial position of the company that it needed funds and therefore
the purpose of allotment of shares to the 9th respondent does not appear to be
with a view to reduce the percentage shareholding of the petitioner. Even though, there seems to be violation of the
provisions of the Act in allotment of these shares, yet, the same could not be considered
to be oppressive especially when the petitioner has not averred in the petition that it
would be interested in taking proportionate shares. Under
these circumstances, since the allotment of shares to the 9th respondent was
for business purpose of the company, we do not consider it appropriate to
set aside the allotment as sought for by the petitioner.
13. From the facts of this case,
it is apparent that even though the petitioner was admitted as a member of the company for
the purposes of mobilization of funds, yet, the sequence of events indicates that the
relationship between the petitioner and the respondents has become so soar that it would
not be in the interest of the company that the petitioner continues as a shareholder
notwithstanding the fact that we have directed the appointment of one of its nominee on
the Board of the company. Therefore, we consider it fit to direct that the company/the
respondents to purchase the shares held by the petitioner. As far as the consideration for
the shares is concerned, in view of the fact that the project has progressed with the
investment of Rs.45 lacs contributed by the petitioner towards equity capital, the
petitioner should be reasonably compensated. While
doing so, we make it abundantly clear that we have not taken into consideration the exit
provision in the Equity Subscription Agreement but our doing so is purely on equitable
consideration. Since the company has taken off after the project stage only recently, we
consider that the shares held by the petitioner should be valued at par together with
simple interest at the rate of 10% from the
date of investment till the date of payment. Accordingly, we direct the
company/respondents 2 to 5 to purchase the shares held by the petitioner on or before 31st
March, 2003. The consideration for the shares could be paid in one or more installments
and interest payable shall be calculated from the date of investment till each installment
is paid. In case, the company chooses to purchase, it will reduce its share capital to
that extent. As long as the petitioner holds shares in the company, our directions
regarding appointment of its nominee as a director will continue. The company will ensure
that notices for all the Board Meetings together with agenda are sent to all the nominee
directors by registered post and notice for the general body meetings will also be sent to
the petitioner by registered post.
14. With the above directions,
the petition is disposed of.
(S.
Balasubramanian )
(A.K.Banerji
)