BEFORE THE COMPANY LAW
BOARD
PRINCIPAL BENCH
NEW DELHI
Present: 1. Justice A.K. Banerji, Chairman
2. Shri S. Balasubramanian, Vice-Chairman
In the matter of the
Companies Act, 1956- Sections 397/398
AND
In the matter of M/S
Rajaram Corn Products (Punjab)Limited
PETITIONERS:
1. Shri Suryakant Gupta
2. Mrs Champa Gupta
3. Shri Krishna Kuman Jindal
4. Shri Shrikant Gupta
5. Mrs Alpana Gupta
RESPONDENTS
1. Rajaran Corn Products
(Punjab)Ltd
2. Shri Subodh Kumar Gupta
3. Mrs Neelam Gupta
4. Ms Rena Gupta
5. Ms Rashi Gupta
Present on behalf of
parties:
1. Dr. Rajeev Dhawan,
Sr.Advocate
..for petitioners
2. Shri Pradeep Aggarwal,
Advocate
..for petitioners
3. Shri L.M. Bhachawat,
Advocate
..for petitioners
4. Shri L.M. Suri, Sr.
Advocate
..for
respondents
5. Shri Anil Agarwal,
Authorised Representative ..for
respondents
6. Shri A.J.Srinivasan,
Advocate,
..for workers union
(Date of final hearing: 5.1.2000)
S. BALASUBRAMANIAN:
1. The petitioners
collectively holding 15.9% equity shares and 27.9% preference shares in M/S
Rajaram Corn Products (Punjab) Limited ( the company) have filed this petition under
Sections 397/398 of the Companies Act, 1956 ( the Act) alleging various acts of oppression
and mismanagement in the affairs of th e company.
2. The main acts of
oppression alleged by the petitioners in the petition relate to reduction of the
percentage shareholding of the petitioners by allotment of shares to the respondents'
group, non delivery of shares certificates to the petitioners, non sending of notices for
general body meetings, falsification of records of the company, conversion of book debts
into equity without authority, under selling the goods of the company and thus
misappropriating the funds of the company, disposal of the assets of the company with a
view to making it into a shell company and mismanagement resulting in continuing loss to
the company.
3. Shri Rajeev Dhawan, Sr.
Advocate appearing for the petitioners submitted as follows. The company was incorporated as a private limited
company in 1974 with members of the family as shareholders.
The majority of the shares were held by the family consisting of the 1st
petitioner, his brother, the 2nd respondent and their parents. In September,
1989, the company was converted into a public limited company. The authorized capital of the company consisted of
both preference as well as equity shares. As on 31.3.1991, the equity share capital was
Rs.1.4 crores and the preference capital was Rs.60 lacs.
The petitioners held, at that point of time, 30,090 equity shares and 12,350
preference shares both of Rs.100/-each constituting 22.09% and 33.46% of the respective
shares in the company. Similarly, the respondents' group held 47.37% equity shares and 7%
preference shares. However, the 2nd
respondent, by either issue of further equity shares or by getting shares transferred to
himself and his group over a period of time, brought his group holding of equity shares to
64.43% and preference holding to 49.39%. In
the process, the petitioners' holding was reduced to 15.91% equity shares and 27.96%
preference shares. The chart on the
shareholding pattern during the period between 90-91
and 93-94 would indicate that the holding of the respondents group went up from 64,525
equity shares in September 1990 to 1,32,955 shares in 93-94. Such increase came about by
issue of further shares in 90-91 and 91-92
and illegal transfer of shares to themselves of
the parents, shares. Even when the present
proceedings were pending, further 36,801 equity shares were allotted to the respondents
group without any offer to the petitioners. Thus the respondents controlling 1,88,056
equity shares(inclusive of 18,300 shares allotted against the book debts) accounting to 78.36% equity shares in the company. Even in
respect of preference shares, 15,845
preference shares were allotted to the respondents group in 1998-99 by which the
percentage holding of the respondents has gone up to 56.13%. Since the company has not
declared any dividend so far, these shares will also be entitled to voting rights. As and when further equity
shares were issued from 1991 onwards, no offer was made to the petitioners to subscribe to
the additional shares notwithstanding the fact that by virtue of the provisions of Section
81 of the Act, proportionate offer and
allotment should have been made to all the members of the company. Some of the shares allotted to the parents were
subsequently transferred to the respondents' group in spite of objections raised. From
1991 onwards, 39940 shares were allotted to the respondents' group and even during the
pendency of the proceedings, further shares were allotted to that group. Even though the respondents claim that the
petitioners were aware of the allotment of shares, since they had signed the wealth tax
returns, yet, such signing of the returns which were prepared by a common accountant of
the family, cannot be viewed as abandonment of the statutory right vested in the
petitioners by virtue of the provisions of Section 81 of the Act to get the shares
allotted on proportionate basis. Non compliance with the provisions of Section 81 would
also make the allotment as invalid as held by the CLB in
Ms Pushpa Prabhudas Vora Vs Voras Exclusive Tools P Ltd (101 CC 300). Further, the respondents have not given any
justification for increase in the paid up capital and the only object for allotment of
shares was to gain absolute control of the company. In that case as held by the CLB in
Dipak G Mehta V Anupar Chemicals Ltd (1999 CC 575), the allotment of shares should
be declared as invalid. Thus the 2nd
respondent has acted in breach of his
fiduciary responsibilities and therefore the said allotments of shares have to be declared
as invalid as held in Dr Jitendra Nath Saha V Shyamal Mondal (1993 1 CLJ 76 CLB). Allotment
to one group exclusively has been held to be oppressive in Akbarali Kalvert V Konkan
Chemicals P ltd ( 1994 3 CLJ 102 CLB).
4. He further submitted as
follows: In the year 1991, the company owed a sum of about Rs.18.3 lacs to a proprietary
firm Rajaram Maize Products. This firm consisted of the family members and without their
consent, 18300 equity shares were allotted in the name of the 2nd respondent
against the dues payable by the company to the firm.
Even though the 2nd respondent claims that the conversion was done with
the consent of the partners of the firm, yet,
as is evident from pages 155 to 169 of the rejoinder, no consent was ever given by the
partners of this firm for adjustment of the dues by allotment of shares in the name of the
2nd respondent. By getting the
allotment in his name against the dues payable to the firm, the 2nd respondent
is in a position to exercise the voting rights in respect of these shares. Even though the
petitioners have filed a civil suit for recovery of the amount of Rs.18.3 lacs from the
company, such adjustment has resulted in allotment of shares without proportionate offer
to other shareholders which is also an act of oppression.
5. The learned counsel
further argued as follows: The company has not delivered share certificates in respect of
the shares held by the petitioners so far. Even though the company contends that relevant certificates had been delivered to the
petitioners, yet, no evidence to that effect has been placed by the company in this
regard. Therefore, the petitioners were
forced to file a petition under Section 113 of the Act before the Company Law Board. Even though by an order dated 11.4.1994, the CLB
directed the company to issue the share certificates after submission of indemnity bond,
the company with a mala fide intention did not issue the share certificates by raising
certain objections on the indemnity bond.
Non delivery of the share certificates to the shareholders is also an act of
oppression and also an act of mismanagement as held in Mrs Trishla Jain V Oswal Agro
Mills Ltd ( 67 CC 125). Further, the company had never sent any notices for the
general body meeting of the company nor any annual reports and as such all the general
body meetings, if had been held, were behind the back of the petitioners who hold
substantial shares in the company. Further,
even though, the petitioners have remitted a sum of Rs.500 to the company in October, 1992
with a request to send all the notices by registered post in terms of Section 53 of the
Act, yet, the company did not send any notices or the annual reports to the petitioners. The company also did not show any evidence to the
petitioners regarding dispatch of notices when they took inspection of the records of the
company on 10.4.1995 as per the directions of the Bench. The onus to prove that notices
were sent is on the company, which onus, the company has not discharged. By this act of not sending the notices to the
petitioners, the respondents have denied the
petitioners any knowledge about the performance of the company. It is the right of every
shareholder to get notices for all the general body meetings in terms of Sections 171,172
and 173 of the Act. It is a setle law as held
in M Mohanraj V Mylapore Hindu Permanent Fund Ltd
( 1990 1 CLJ 73) and Eastern Linkers Pvt Ltd Vs Dina Nath Sodhi (55CC
462) business transacted in meetings
without notice to all shareholders is invalid. The law is also very specific about issue of 21 days notice for
the general body meetings and the notice period is mandatory as held in Calcutta
Chemicals Ltd V Dhiresh Chandra Roy (58 CC 275) and it has also been held that
with out indicating specifically in the notice for the meeting the business of increasing
the capital of the company, the same cannot be increased in the meeting ( Ramjilal Biswala V Baitan Cables Ltd
(ILR 1964 14 Raj 135). When the shareholders are denied their statutory rights,
then such denial constitutes a grave act of
oppression. The 2nd respondent is
guilty of fabrication of documents. In the affidavit filed before the CLB in connection with
the petition under Section 163(6) of the Act on 28.5.1994, the 2nd respondent
had stated that various document/records of the company like register of charges, register
of fixed assets, minutes books of the meetings of shareholders and directors etc had been
lost and that an FIR had been filed by the company on 18.3.92 in this regard. However, in the present proceedings, copies of
various records like proceedings of general body meetings, board meetings, disclosure of
interest etc. have been produced by the 2nd
respondent in his various affidavits. No
explanation has forthcome from the 2nd respondent as to how he could produce
the copies of the various documents if they had really been lost during the year 1992. Therefore, all the documents produced now are
fabricated only to counter the various allegations made by the petitioners in the petition
and as such they cannot be relied on.
6. The learned counsel
further argued: The 2nd respondent has
been acting against the interest of the company by benefiting himself at the cost of the
company. The 2nd respondent was a
partner in firm M/S Rajaram and Brothers till November, 1992. Without disclosing his
interest in this firm, which is a statutory requirement under Section 299, the 2nd
respondent allowed the company to enter into transaction to purchase raw materials from
this firm worth about Rs.8.83 crores. Even
though the 2nd respondent now relies on the copy of the minutes of EOGM on
5.2.90 at Annexure B-10 to state that the
approval of the general body was taken before entering into the transactions with the
firm, no reliance can be placed on these documents in as much as the same is fabricated as
the original minutes were reportedly lost in 1992. Since he had not disclosed his interest
in the transactions, thus committing a breach of trust as held in Yashovardhan Saboo
V Groz Beckert Saboo Ltd (83 CC 371 CLB), he has disqualified himself from acting as a director by virtue of the provisions
of Section 283(1)(i), but still continues as a director and therefore he should be removed from that position.
7. The learned Counsel
further submitted: The 2nd respondent is also guilty of siphoning of funds of
the company as is evident from the fact that the revenue received from sale of products is
much lower than the revenue received by similarly
placed companies producing similar products. Page
181 of the petition gives the details of short realization for the years 1989-90 to
1992-93 from which it could be seen that the short realization is of the order of about
Rs.3.3 crores. The short realization reflects
the amount siphoned of by the 2nd respondent. He has also manipulated the
production records to show under yield and has thus siphoned of the funds of the company. He should be directed to account for the said
amount. Further the 2nd respondent, being
in sole management of the company, has
disposed of a large number of assets of the company even though there was a restraint
order from the CLB. By sale of these assets,
the company has been reduced to a shell. The
figures in the Balance Sheet for the year 1996-97 to 1999-2000 would indicate that the
company has disposed of substantial assets of the company including a factory land in
Chandigarh. Now the company is proposing to
sell the Bangalore Unit, inspite of certain orders from the Labour Court and once it does
so, there would be no assets left in the company and the survival of the company itself
would become shaky. Once the Bangalore unit is sold the company would be left with
negligible assets compared to the liability of over Rs 2 crores. Therefore the company
should be directed not to dispose of the Bangalore unit, which proposal has also been
opposed by the workers also. Considering the
facts that the company has been incurring heavy losses with an accumulated loss of Rs.3.9
crores as on 31.3.2000 as against the share capital of Rs.3 crores, the company may have
to be wound up on just and equitable grounds. It has been held in Seth Mohan Lal V Grain Chambers Ltd (AIR
1968 Sc 772). Delhi Automobiles P Ltd V Maruti Ltd (48 CC 676), SBI V Hegde & Golay
Ltd (62 CC 239 Kar), and Universal Glass Ltd
v Meerut Bottlers P Ltd (58 CC 68) that if it is impossible to carry on the
business of the company except at a loss or the company is financially crippled, heavily
indebted and the financial position is not satisfactory then the company has to be wound
up on just and equitable grounds.
8. Summing up his arguments,
the learned counsel pointed out that the acts of oppression and management as elaborated
by him would merit winding up of the company on just and equitable grounds. Since the 2nd respondent is carrying on
the affairs of the company as if he the sole proprietor, there had been no accountability
towards other shareholders. The conduct of the 2nd respondent lacks in probity
and is unfair and as such is oppressive to the petitioners as held in Needles
Industries case ( 51 CC 743). Relying on Re HR Harmer Ltd case ( 1958 3 AER 689), he
pointed out non compliance with the statutory procedures in the conduct of the affairs of
a company itself is an act of oppression. He also referred to Clemens V Clemens Bros
Ltd ( 1976 2 AER 268) to the proposition that in a family company, when it is
proved that the majority has acted in an oppressive manner by virtue of the majority share
holding, the minority would be entitled to the equitable remedy proved under Section
397/98 of the Act. The only way by which the grievances of the
petitioners could be redressed is that all decisions taken by the 2nd
respondent right from 1990 should be declared as null and void and a Receiver or
Administrator be appointed to take over the management of the company. Otherwise, a
the respondents group should be directed to purchase the shares held by
the petitioners at a fair value to be determined on the basis of the status of the company
in 1989 before the company became a public
limited company as was held by the CLB in Mrs Farhat Sheikh V Esemen Metalo
Chemicals P Ltd ( 87 CC 290). Alternatively, the CLB should recommend to the Government to
apply for winding up of the company on just and equitable grounds as the substratum of the
company has already gone.
9. Shri Suri, Sr. Advocate appearing for the
respondents initiating his arguments, contended that
this petition has been filed for an oblique motive to put pressure on the 2nd
respondent to settle disputes relating to other firms of the family. There are certain proceedings pending in relation
to some of the firms of the family wherein the 2nd respondent has sought for
rendition of the accounts and appointment of a Receiver etc. in respect of the firm
Rajaram Maize Products which is presently under the control of the 1st
petitioner. In respect of another partnership
firm Rajaram & Brothers, certain proceedings are pending and this firm is also under
the control of the 1st petitioner. The
family members of the 2nd respondent have deposited a huge amount of money of the order of Rs.4.5 crores
in these firms and the claim of these family members are pending before the National
Consumer Commission. In view of these
litigations initiated by the 2nd respondent against the firms controlled by the
1st petitioner, as a counter blast, this petition has been filed against the
company which has always been under the
control of the 2nd respondent. These firms are also in the same business as
that of the company and by filing this petition and seeking for winding up of the company,
the petitioners are trying to eliminate the competition faced by the firms from the
company. Therefore, he prayed that this
petition should be dismissed in limine as being a motivated petition.
10. In regard to issue of further shares,
the learned counsel submitted that the purpose of allotment of shares during different
years was to augment the resources of the company. After the company became a public
company, in an EOGM held on 5.2.90, general body approval was obtained in terms of Section
81(1A) and thereafter shares were allotted to the willing family shareholders. It is
incorrect to say that the petitioner group was not allotted any shares. When shares were allotted in 90-91, all the share
holders were allotted shares as is evident from the fact that the petitioners shareholding
went up from 30,090 in September 1990 to
32,340 in September 1991. Likewise, the shareholding of the parents also went up by about
3500 shares during this period. During 1991-92 also the parents were allotted 5000 shares
when shares were allotted to the respondents. The petitioners knew about this allotment
and on their own volition did not offer to
subscribe to further shares. Further since the disputes
between the parties started only in the middle of 1992 in respect of the firms, the
question of deliberately denying the petitioners their entitlement during the earlier
period did not arise. The company had to comply with the directions of Punjab National
Bank which required the company to increase the capital of the company and all the
shareholders were aware of the need to raise the share capital and since the petitioners
never took any interest in the affairs of the company, they never sought to subscribe to
additional shares. Since the company is a
closely held family company, the petitioners cannot disclaim any knowledge of increase in
the share capital and in case they had approached the company for allotment of shares, the
company would have definitely allotted shares to them also. In regard to the transfer of
shares held by the parents to the daughters of the 2nd respondent, he pointed
out the parents on their own volition transferred their shares and as such the petitioners
cannot make any allegation against the 2nd respondent in this regard. He also pointed out that the percentage holding of
the respondent group in September, 1990 together with the shares held by the parents
accounted to 63.51% and in 1994, since the parents had transferred their shares to the
respondents' group, its percentage holding came to 64.43%.
In other words, he pointed out that the respondents have not increased their
percentage holdings at the cost of the petitioners. He further submitted that with the
view to buy peace, the 2nd
respondent is willing to offer such number of shares to the petitioners that would restore the percentage holding to that of 22.09%
as was in September, 1990 subject to their paying the consideration for the same. By this, he pointed out that the act of oppression
alleged by the petitioners could be redressed.
11. As far as the allotment of shares
against the book debts of the firm is concerned, he pointed out that the allotment was
made to Rajaram Maize Products on 26.5.1991. Since
the shares cannot be held in the name of the firm, the shares were issued in the name of
the 2nd respondent, being a
partner of the firm. Since this petition was
filed only in November, 1994, the petitioner cannot challenge this allotment made in May,
1991 due to limitation as has been held in Kerala
State Electricity Board V TP Kunhaliumma (AIR 1977 SC 282), Surinder Singh Bindra V Hindustan Fasteners
P Ltd (AIR 1990Del. 32), Anil Gupta V Delhi
Cloth and General Mills Co Ltd (54 CC 301 Del), Jagjit Rai V Punjab Machinery Works P
Ltd (1995 (2) Panjab Law Reporter 484). He
also pointed out that the allotment to the firm was made at the specific instruction of
the father, Shri Rajaram who was also a managing partner of the firm. In this connection, he referred to Page 652 and
653 of Volume 2 wherein a letter from Shri Rajaram dated 30.3.1991 has been enclosed. He also referred to similar letters of Shrimati
Prabha Aggarwal and Subodh Kumar Gupta, partners of the firm at Page 655. He also pointed out that even though the petition
was filed in 1994, yet, the father, being the
managing partner of the firm was not impleaded as a party as the petitioners knew that he
had given his consent for the allotment. This
itself would show, he contended that the petitioners were aware of the consent given by
the partners for allotment of shares against the book debts of the firm. Further, since the 2nd respondent is
holding the shares for the benefit of the firm, the petitioners cannot have any grievance
in the shares being held in the name of the 2nd respondent. He contended that
even otherwise, the petitioners cannot raise this issue in the present petition in as much
as they have already filed a civil suit challenging the said allotment and refund of the
amount.
12. In regard to non delivery of the share
certificates, he submitted, that the allegation of the petitioners is not based on facts. He pointed out that the company was incorporated
in 1977 and till 1992, the petitioners never complained about non delivery of the share
certificates for over 15 years. Only after
the disputes started between the parties in 1992, they raised this issue and complained to
the Registrar of Companies and later to the
Company Law Board. In accordance with the directions given by the CLB, the company was to
issue duplicate certificates subject to the petitioners furnishing indemnity bonds.
None of the petitioners except the 4th petitioner furnished an indemnity
bond. Even this bond was not in proper form. Therefore, it is the petitioners who
did not comply with the directions of the CLB and the company cannot be held responsible
for non delivery of the share certificates. He also pointed out that without complying
with the directions of the CLB, the compliance of which would have enabled the company to
deliver the share certificates, the petitioners have filed a case before the District
Consumer Forum, Chandigarh on the same issue and the proceedings are pending. They also complained to the Registrar of
Companies, who filed a prosecution for non compliance with the provisions of Section 113
of the Act which was later on withdrawn after the ROC took inspection of the documents of
the company and after having satisfied himself
that originally the share certificates had
been delivered to the shareholders. He
submitted that to put an end to this controversy, the company is ready and willing to
deliver duplicate share certificates to the petitioners, if the Bench were to order so on
any terms and conditions imposed by the Bench.
13. As far as the allegation relating to
non sending of notices for the general body meetings are concerned, he pointed out that
till 1992, there were no disputes between the parties and notices of the meetings used to
be given to the petitioners and meetings were regularly held. Further, till 1994, Shri Rajaram, the father of
the parties was the Chairman of the company with full control of the company. Till 1994, the petitioners never complained about
non receipt of notices for the meetings. After
the petitioners remitted Rs.500/- to the company with the request to send notices by
registered post, all notices were being sent accordingly but the petitioners never
attended any meeting. The annual reports of the company were also being regularly sent. As far as the grievance of the petitioners that
proof of dispatch of notices was not given for inspection is concerned, the CLB had
directed inspection of only the statutory records which were produced for inspection and
the petitioners never sought for inspection of proof of dispatch of notices. The petitioners have not averred anywhere the
details of the meetings for which notices had not been received by them. This
unsubstantiated allegation, he submitted, has been made only to strengthen their case of
oppression.
14. In relation to the allegation that the
2nd respondent has fabricated the documents of the company, the learned counsel
submitted that the FIR filed on 18.3.1992 regarding loss of records of the company related
to records prior to 1989. The ROC directed
the company to produce records relating to register of charges, register of fixed assets,
minutes books, register of shareholders and other documents etc. pertaining to period
before 1989 in connection with scrutiny of Balance Sheet as on 31.12.1986. These records were lost in transit while an
employee was carrying them to the ROC office. The documents given for inspection and also
relied on by the 2nd respondent in these proceedings relate to the periods
after 1989, the records of which were always available with the company and were also
given for inspection to the petitioners as per directions of the CLB. Further, the Registrar of Companies had examined
the records on 6.8.1993 and had also countersigned them.
Therefore, the allegation that the records of the company have been fabricated to
meet the allegations in the petition has no basis.
15. As far as the allegation relating to
the transaction with the firm M/s Rajaram
& Bros are concerned, the learned counsel pointed out that the company had been having
transactions with this firm even before it
became a public limited company. This firm
consisted of both the 2nd respondent as well as the 1st petitioner
including their father as partners. In the
Board Meetings held on 21.3.1989, 22.3.1990 and 5.2.1990, the 2nd respondent
had disclosed his interest in the firm. In
addition, in a general meeting held on 5.2.1990, the general body also was informed of the
interest of the 2nd respondent in the partnership firm. Therefore, the contention that the 2nd
respondent had violated the provisions of Section
299 and has disqualified himself as a director has no basis.
16. The learned counsel further submitted
that the allegation of under selling the products of the company and consequent siphoning
of funds is purely imaginary and not based on
any concrete material. These allegations
have been made by comparing the prices of the products of the company with that of
Sukhjeet Starch & Chemicals Company. The
products of the said company are of high quality and the price includes various heavy
overheads. Further the plant of that company
is a modern one while that of the respondent
company is old. That company has a large
number of products compared to the respondent company and as such they are in a position
to recover various overheads through other products.
Further, the plant of the company is located in the heart of Maize growing area
while the plant of the respondent company is located in Chandigarh. The cost of transportation and the loss in transit
have to be accounted for by the respondent company while such costs are not incurred by
the other company. The learned counsel also
pointed out that the petitioners themselves who are making similar products as that of the
company are selling their products at a much lower price than the respondent company. He also pointed out that of the four major
starch producing companies in Northern Region, except Sukhjeet Starch and Chemicals, other
3 companies are also having the same problems as that of the respondent company. He also pointed out that more than 90% of the
products of the company are being sold on tenders to institutions and therefore the
allegation of under selling and siphoning of
funds arising there from does not stand to scrutiny.
17. Summing up his arguments, the learned
counsel pointed out that nothing survives in this petition once the respondents have
agreed to restore the percentage shareholding of the petitioners and issue of duplicate
share certificates. Other allegations, he
contended, are without merits and have been made only to harass the respondents. Referring
to the prayer of the petitioners that the CLB should recommend to the Central Government
for winding up of the company, the learned counsel submitted that this prayer itself would
indicate that the petitioners are more interested in having the business of the company
closed than to seek the equitable remedy provided for under Sections 397/398 of the Act. Shri Suri pointed out that the company has always been under the control of the 2nd
respondent and that he and his family members who are directors of the company have been
actively participating in the affairs of the company and they have given personal guarantees to the banks and
have mortgaged their properties on behalf of the company in addition to providing over Rs
1.35 crores as interest free loans to the company. Further none of the directors is
drawing any remuneration except the 2nd respondent who draws only Rs 7500 as
remuneration per month. No doubt that the company is having financial problems which has arisen due
to interest burden on the borrowings and not due to operational losses. Giving a summary
of the performance of the company, he pointed out that the gross sales in 1998-99 of Rs
529 lakhs went upto Rs 721 lakhs in 1999-2000 marking an increase of 38%. He pointed out
that once the Bangalore unit is sold and the proceeds utilized for clearing the
outstandings, the interest burden would come down and the profitability of the company
would improve. He also submitted that no minority shareholder can demand winding up of the
company when the majority desires to
continue with the company. Accordingly he prayed that this prayer of the petitioners
should be rejected. In regard to the purchase
of the shares of the petitioners, he submitted that the financial resources of either the
company nor the respondents would enable them to purchase
the shares held by the petitioners and as such the respondents are not willing for
this option.
18. We have considered the able arguments
of the senior counsel appearing for the parties. This petition was filed sometime in 1994
and during these years, both the sides had
filed a number of applications. On the applications
CA 212 and 220, this Bench passed an order on
1.12.1994, directing the company to give inspection of the statutory records of the
company that a share holder was entitled to under the law and also recorded the
undertaking given by the counsel for the respondents that notices for all the general
meetings would be given by registered post and that the company would not dispose of any
asset except in the normal course of business. Later,
when it was complained that the company had failed to give inspection, we once
again, by an order dated 23.3.95, directed the company to give inspection in the presence
of the Bench Officer and the inspection was carried out on 8.4.95. In the hearing held on
10.7.95, considering the family relationship of the parties and that there were other
disputes between them, we advised the parties to attempt at settling all disputes amicably
and this suggestion was agreed to by the counsel for the parties. However, the parties could not reach an amicable
settlement, which fact was recorded in our order dated 14.11.95. In the meanwhile the
parties were directed to complete the pleadings. In the hearing held on 23.5.96, compromise efforts were once again revived. In the
order dated 23.5.96 it was recorded that the petitioners were willing to sell their shares
to the respondents at face value together with an interest at the rate of 10% per year,
while the respondents were only willing to
purchase the shares at the book value which was not acceptable to the petitioners and out
suggestion for appointment of an independent valuer to value the shares was not accepted
by the respondents. Later the respondents filed an application dated 4.6.96 stating that
their authorized representative who appeared
on 23.5.96 had not been instructed to submit that the respondents were willing to purchase
the shares of the petitioners at the book value and that due to financial difficulties,
neither the company nor the respondents would be able to purchase the shares. Thus the
compromise efforts once again failed and the matter was fixed for final hearing. The
company filed an application CA 155/96 seeking permission to dispose of certain
surplus/unusable machinery lying in the Bangalore unit , which was opposed by the
petitioners who desired to purchase the same
at Rs 60 lakhs. By an order dated 17.9.1996,
we gave them the permission to do so with the direction that the deal should be completed
on or before 17.10.96. Later, it was reported that the petitioners had failed to complete
the deal. The company thereafter filed an application, seeking permission to dispose of
certain assets of the company that had become
unserviceable to augment the resources of the company. After perusing the details of the
need for funds and having been convinced that the request of the company was genuine, this
bench passed an order on 16th January 1997, permitting the company to dispose
of un-usable assets up to the book value of Rs. 50 lakhs with the direction that the money
realized should be utilized only for the purpose of the business of the company. In the
hearing held on 13.8.97, the parties once again evinced interest in settling the disputes
amicably but nothing was forthcoming and the matter was fixed for final hearing but was
adjourned from time to time at the request of the respondents on various grounds and
finally the hearing was concluded on 5.1.2001.
19. On merits of the case, one of the main
act of oppression complained by the petitions
is that the company had allotted shares to one group in exclusion of the petitioners in
violation of the provisions of Section 81 of the Act and that by doing so, the percentage
holding of the respondents has gone up while that of the petitioners has come down. It is
not that only when a new majority is created or an existing majority is reduced to
minority by allotment of new shares, then such
an act could be considered to be an act of oppression. Non compliance with the statutory
provisions in the issue and allotment of shares could also be considered to be an act of
oppression in given circumstances. The
company is a public limited company and is therefore bound to comply with the provisions
of Section 81 of the Act, according to which shares are to be offered on a proportionate
basis to the existing shareholders except in cases where the general body otherwise
decides in terms of Section 81(1A) of the Act. According
to the respondents, the general body, in an EOGM held on 5.2.90 had unanimously passed a
special resolution in terms of Section 81(1A). To substantiate this they have enclosed a
typed extract of the said resolution at
Annexure B-10 to the reply. Later, they have also filed a Photostat copy of the minutes at
Annexure R-12 to their affidavit dated 23.6.98 (page 332 of Vol IV). The petitioners are
questioning this resolution on two grounds- one is that the same is fabricated and the
other is that if at all this resolution had been passed then it was done in a meeting
without notice to the petitioners and as such
is invalid. It is admitted by the petitioners that between September 1990 and September
1991, their group was allotted 2250. During
the said period, the company had allotted 27,050 shares. Eventhough this allotment to the
petitioners was less then their proportional entitlement, they did not seem to have
protested. This indicates that either they were aware about the decision of the EOGM or
they were not interested in getting more shares in the company to maintain their
percentage holding. The company had issued
further shares of about 40000 shares during 1991-92 of which about 36000 shares were
allotted to the respondents' group and 4000 shares to the parents. No shares had been issued to the petitioners'
group. Again during 1995-96, about 36800
shares were allotted, that too, only to the respondents' group. When the company had
allotted shares to the petitioners after the EOGM resolution in 90-91, the company could
have offered to the petitioners, further shares when subsequent allotments were made
considering the family nature of the company. There is nothing on record to show that the
petitioners were offered any shares on these occasions.
Even though the respondents have justified the allotment of shares on the basis of
the need for funds of the company, yet, exclusion of a particular group of shareholders in
the allotment of shares in a family company like the respondent company has to be
considered to be an act of oppression. Therefore in the normal course, these allotments
would have to be declared as invalid. However,
taking into consideration that the company required funds and that these funds have been
utilized for the benefit of the company and considering the facts that the 2nd
respondent is ready and willing to restore the original shareholding percentage of the
petitioners we do not propose to declare the allotment of further shares as invalid. The
acceptance of the offer of the company by the petitioners would have put an end to this
act of oppression, but the learned counsel for the petitioners declined to accept this
offer.
20. As
far as the allegation relating to non delivery of share
certificate is concerned, we feel that such a trivial issue has become a bone of
contention between the parties resulting in a long
drawn legal battle. We find the stand of the respondents in this matter has been highly unreasonable by insisting that they had delivered the original
certificates to all the share holders including the petitioners. The law permits issue of
duplicate certificates, even in cases where original certificates had been issued, the
only requirements being that the originals should have been lost. In a family company
wherein the shares are closely held, the
company could have taken a pragmatic view and issued the duplicate certificates without
any legal intervention. This uncompromising
stand of the company had forced the petitioners to agitate
this issue for a long time both by way of a petition before the Company Law Board
and also through an application to the Consumer Court. Without examining as to whether
originally the certificates had been issued or not, we think that it is high time that this dispute is resolved. Therefore, taking into consideration the
submissions made by the counsel for the
respondents that on a direction from this Bench, the company would be willing to issue
duplicate share certificates, we direct, that, within
a month from the date of receipt of this order and on the strength of this order, the
company should issue duplicate share certificate in respect of all the shares held by the
petitioners' group without observing the formalities required under the Rules for issue of
supplicate certificates, since the company is a closed held company and that no one else has so far claimed any rights under the shares.
21. In respect of the allegation relating
to unauthorized conversion of the dues payable to M/s Rajaram Maize Products of
Rs.18,30,000, this is not a matter to be adjudicated by this Bench. The petitioners have already taken appropriate
proceedings for recovery of this amount from the company and therefore other than noting
that when this conversion took place, the company had failed to comply with the provisions
of Section 81 of the Act for which we have already given appropriate directions in
paragraph 19 above, no further directions are given in this regard.
22. Another allegation made by the
petitioners relate to under selling the products of the company. According to the petitioners during the years 89
to 93, the amount of under selling was to the tune of about Rs 3.31 crores, which had
allegedly been siphoned of by the 2nd
respondent. They have compared the working
results and sale price of the products of one Sukhjeet Starch & Chemicals Limited with
that of the respondent company and have alleged under selling and consequent siphoning of
funds by the 2nd respondent. We
are generally in agreement with the submissions made by the learned counsel for the
respondents in this regard. A perusal of the
Annual Report of M/s Sukhjeet indicates that
as on 31st March, 1991, it had a gross block of about Rs.10 crores with a
turnover of about Rs.27.5 crores during the year 1990-91.
The gross block of the respondent company on the same date was about Rs.2.63 crores
with a turnover of about Rs. 9.28 crores for
the year 90-91. In other words, M/S Sukhjeet Starch & Chemicals Ltd. is larger in size
and turnover at least by 3 times to that of the respondent company. Therefore, it would be inappropriate to form an
opinion about the performance of this company with that of the other on a comparison
basis. In case of allegations of siphoning of
funds, better particulars are required to adjudicate on the allegation. In the petition, except the comparative position,
no other details of under selling of the products have been furnished to substantiate the
allegation and since this allegation of siphoning of funds is a serious allegation, we
cannot adjudicate this allegation without
some concrete materials.
23. In regard to non issue of notices for
the general body meetings, it is on record that
when this complaint was made in the hearing held on 1.12.1994, we recorded an undertaking
given by the learned counsel for the respondents that notices to be given to the
shareholders as per law would be sent to the petitioners by registered post. After this order, a number of hearings had taken
place and at no time the petitioners raised the issue about non receipt of the notices for
the subsequent general body meetings. Whether
the company issued notices or not prior to that order is of academic nature especially
when the petitioners have not cited any decision that had been taken in those meetings
which are prejudicial to the interests of the petitioners to declare those decisions as
invalid for want of notice to the petitioners
except the one relating to the passing of the resolution in terms of Section 81(1A). To
put an end to this grievance and to ensure
that the petitioners do not have any complaint in this regard in future, we direct the
company to always send notices for all general body meetings to the petitioners by
registered post under the authority of this order.
24. Another allegation of the petitioners
is that the 2nd respondent did not disclose his interest in M/s Rajaram &
Bros in terms of Section 290 when the company entered into transactions with the firm and
as such the 2nd respondent is
disqualified from acting as a director by virtue of the provisions of Section 283(1)(i).
They have also alleged that the records produced by the respondent to evidence his
disclosure are fabricated. It is on record that even when the company was a private
company, it was having transactions with the said firm in which the 2nd
respondent as well as the petitioner brothers were
partners. As per Section 299, a director has to disclose his interest in any contract or
arrangement and in the instant case, since contracts were entered into with a firm in
which the 2nd respondent was a partner he should have disclosed his interest.
The scope of the “disclosure of interest” in this
Section was examined by this Board in A.Sivasailam
V ROC (83 CC 141) and it came to the conclusion that the term
“disclosure” would mean “to make others aware of which they were not
aware” to mean that if the other directors
of the Board are otherwise generally aware of the interest of a director in an arrangement
or a contract, then the non disclosure in a Board meeting would not attract the penal
provisions. In the present case, the Board of the company consisted of family members and
the firm also consisted of family members and the company even as a private company was having dealings with the firm
and as such other members of the Board must have had knowledge of the interest of the 2nd
respondent in the firm. Therefore, even assuming that the allegations of the petitioners
that the resolutions indicating the disclosure are fabricated, yet, non disclosure of
interest, in facts of the case, does not attract the provisions of Section 283(1)(i).
25. The
petitioners have also raised the issue of fabrication of records of the company on the
ground that according to the respondents themselves, certain records of the company had
been lost and they had lodged an FIR with the police. This allegation is based on an
affidavit filed by the respondent company on 28.5.94 in
a different proceedings before this Board under Section 196(4) of the Act in which the company had stated about the loss of
records and consequent filing of an FIR on 18.3.92 as
at page 256 of the counter affidavit. In those proceedings, the petitioners had
sought for copies of the agenda and proceedings of the EOGMs and AGMs of the company from
1980 to 1992. In its order dated 27th June 1995 (Page 284 of Vol IV) the Board
has recorded that certified copies of all the resolution had been handed over to the
petitioners and the same had been accepted by them and that the company filed a copy of
the FIR about the loss of Register of
Charges, Register of Fixed Assets, Minutes Book of Share holder meetings and Directors,
Register of Members etc. According to the respondents, the records lost pertained to the
period before 1989 and the records relied on the proceedings are for the periods
afterwards and therefore the allegation of fabrication of records is baseless. They have also stated in page 297 of Vol IV that
the records handed over to the petitioners on 27th June 1995 pertained to the
period after 1989. From page 340 of Vol IV wherein a copy of the letter from ROC dated
17.9.91, we find that the ROC had called for certain records to scrutinize the Balance
Sheet of the company as at 31.12.86 and 31.12.87. If so, it is quite possible that the
records lost pertained to the period relevant to the balance sheet dates. Any way, we note
from the authentication of the ROC at page 97 of the Rejoinder that he had inspected
certain documents on 6.8.93, much prior in time to the filing of this petition. The
petitioners had also taken inspection of the same documents authenticated by the
ROC. Therefore, it is possible that the FIR filed on 18.3.92 did pertain to records prior
to 1989 as contended by the respondents The petitioners have raised this issue of
fabrication of records more with reference to
the minutes of the EOGM held on 5.2.90 wherein it is recorded that the 2nd
respondent had disclosed his interest in the firm and that the general body had passed a
resolution in terms of Section 81(1A). Any way, we have held in the earlier paragraph that in the facts of this case, non disclosure
could not have attracted disqualification and that not withstanding the resolution under
Section 81(1A), the petitioners should have been offered shares when further shares were
allotted.
26. Yet another allegation relates to
disposal of assets of the company on the ground that such sale of assets has resulted in
the company turning out to be a shell company. In the hearing held on 1.12.1994, this
Bench had recorded an undertaking by the counsel for the respondents that the company
would not sell its assets. By a contempt application CA 19/96, the petitioners alleged
that the respondents had, in breach of the said undertaking, had issued an advertisement
for sale of Sorbitol plant in the Bangalore and
thus had committed contempt of the
order of this Board. In the meanwhile, the company moved an application CA 155/96 seeking
permission to sell Sorbitol plant in Bangalore for a sum of
Rs 51.5 lakhs. At that time the
petitioners did not question the need to sell the machinery but only questioned the
consideration on the ground that the plant was worth more than Rs 60 lakhs and that they
would be willing to purchase the same at Rs 60 lakhs. On the consent given by the
respondents for this proposal, this Bench passed an order on 17.9.96 permitting the
petitioners to purchase this plant at Rs 60 lakhs. However, for some reason, the
petitioners could not purchase that plant. In view of this, the company filed an affidavit
seeking permission to dispose of un-usable assets of the company to meet the financial
needs of the company. On our directions, the
company also filed detailed figures to evidence the need for funds. After hearing the parties, this Bench passed an
order on 16.1.1997 observing as follows: "From
the Bank statements and the details of the current liabilities as on 30.11.96 filed by
respondents duly certified by the Managing Director of the company, we are convinced that
there is genuine need for funds and in order to comply with the stipulations of the
company's bankers, certain unusable assts of the company have to be disposed of. In fact,
if the petitioners had purchased the Sorbitol plant as per the consent order dated
17.9.96, the problem perhaps would not have aggravated. However, keeping in view the
apprehensions of the petitioners as already referred to we direct that the respondents
may: 1. dispose of unusable assets up to the book value of Rs. 50 lakhs,2. the sale
proceeds of the assets shall be deposited in the CC account with the bankers immediately
on receip,3. the company shall not utilize the funds for any purpose other than the normal
operations of the company." Thus
the respondents had taken the general permission of this Bench to sell unusable assets of
the company up to a particular book value. The petitioners have not established, even
though alleged, that the company had either sold usable assets or assets worth more than
Rs. 50 lakhs book value nor that any asset had been sold without need for funds. However,
the petitioners complained to this Bench that in violation of our order dated 16.1.97, the company had issued an advertisement for sale
of the entire Bangalore Unit, the book value of which was more than Rs.50 lacs. During the hearing of the application, the
petitioners also suggested that the company, in exchange of the shares held by the
petitioners, could transfer the Banagalore Unit so that the disputes between the parties
could come to an end. This suggestion was not accepted by the respondents as according to
them the value of the bangalore unit was much higher than the value of the shares. Therefore, we modified the earlier order on
3.6.1999 stipulating that if the company were to
sell any asset other than in the normal course of business, our permission should be
obtained. The respondents filed CA 164 of
1999 seeking disposal of various unusable assets. A
detailed order was passed on 19.8.1999 giving permission to the company to dispose of the
assets mentioned in the list furnished by the company subject to the condition that full
details of the sales should be furnished and that the consideration received should be
used only for the normal business purposes of the company. Later, the company filed CA 148
of 2000 stating that in view of the closure of the Bangalore Unit right from 1995 and with
a view to clear pending liabilities, the company has entered into an agreement for the
sale of the land, building and machinery at the Bangalore Unit for a sum of Rs. 205 lacs
after giving wide publicity in various newspapers and as such permission be accorded to
sell these assets. It was also stated that as
per the terms of agreement dated 25.7.2000 with the buyer, the agreement was subject to
the approval of this Bench and that the company had already taken an advance of Rs.20
lacs. This application was opposed by the
petitioners as also by the workmen of the Bangalore Unit of the company. Elaborate arguments took place on this
application- the learned counsel for the respondents pressing the application and the learned counsel for the
petitioners and the workmen opposing the application. Since the permission has been sought for
in an interlocutory application and as we are disposing of this petition itself
finally by this order, we are not detailing the arguments of the counsel. While in an
interlocutory stage, with a view to preserve the assets of a company during the pendency
of the proceedings, suitable directions could be given as we did in this case, at the
final disposal of the petition no blanket
order in the form of either permission or restraint could be passed as the decision to
deal with the properties of a company is within the realm
of the management/shareholders and as such we are not passing any order on the application
of the respondents CA 148/2000 and leave the
matter to the company to decide in accordance with law after taking into consideration the
objections raised by the petitioners and the workmen.
27. Having
given our findings on the allegations in the
petition, we shall now deal with
the reliefs sought for by the petitioners. While in the petition the reliefs sought relate to quashing all meetings held without
notice to the petitions, cancellation of allotments
made without notice the petitioners, removal of
the respondents 2 to 5 as directors, appointment of a directors from the petitioners
group, appointment of an administrator or in the alternative order winding up of the
company, during the hearing one more relief relating to purchase of the shares of the
petitioners by the respondents was sought. The learned counsel for the petitioners sought
for a direction that the respondents should purchase the shares of the petitioners group a
at a value to be determined as in 1989 or in the alternative we should direct the Central
Government to apply for winding up of the company. He relied on a number of cases to
substantiate his prayers. In regard to direction for purchase of shares, this Bench has
taken such a decision only in cases where the companies had been closely held or
where both the groups had participated effectively in the management of the company
and that one group had, by acts of oppression, ousted the other group and that restoration
of the shareholding would only result in further disputes or deadlock in relation to the affairs of the company. In the
present case,
while we have held that the allegations of acts
of oppression have been established, we have
also held the other allegations have not been established and to put an end to the acts of
oppression complained of, we have given
suitable direction. Further, none of the petitioners was an
original promoter of the company and the petitioners’ group had always been a
minority and none from that group was in the management to result in possible deadlock.
Once the petitioners acquire the shares as per our directions which would restore their
percentage holding as existed in 1990, with our direction for issue of duplicate
certificates and for issue of notices for general body meetings by registered post, majority of the acts of oppression complained of
would stand redressed.
28. Therefore, direction for sale
and purchase of shares would not
normally arise in this case. It is to be
noted that even in some cases where allegations of oppression have not been established,
considering the facts of those cases, this
Board had directed one group to purchase the shares of the other. In Eseman Metalo
case cited by the learned counsel for the petitioners, wherein also the main allegation
was issue of shares in exclusion of the petitioners, this Board had ordered the
respondents to purchase the shares held by the respondents
on the ground that the petitioner
being in minority could not continue in the company. In the present case, however, the
respondents have expressed their inability to purchase the shares of the petitioners due
to financial difficulties which is factual as is evident from the need of the company to
sell its assets, we feel that it would not be appropriate to direct the respondents or the
company to purchase the shares of the
petitioners more so when suitable directions
to redress the grievances of oppression have been given by us. In Power
Tools and Appliances Ltd V Jaladhar Chakroborty
( 96 CWN 313) wherein such a demand was made before the Calcutta High Court
on the basis of the decision of the Supreme Court in Needle Industries (1981
SC 1298) case that the Court could order purchase and sale of shares even
when acts of oppression are not established, the High Court held that in the Needles case,
the respondents were earlier willing to purchase the shares and therefore the Apex court
took the same into consideration in directing such a purchase, while in the case before the High Court, the
respondents were not willing and therefore the Court could not order the purchase and
sale. To come to that conclusion the Court had relied on Maharani Lalita Rajya
LakshmiV Indian Motor Co Ltd ( AIR 1962 Cal 127) wherein the had observed “It
is also proper to emphasise that the power of the court to make such order, as it thinks
fit under Section 397(2) of the Act is expressly stamped with the purpose of
‘bringing to an end the matters complained of’. Therefore wide as the power of
the court is flowing from words of expression ‘such order as it thinks’. It is
nevertheless controlled by the overall objective of this Section which must be kept
strictly in view that the order must be directed ‘to bringing to an end the matters
complained of.’. The marginal note of Section 397 of the Companies Act shows also
that the purpose of the order of the court in this section is to give ‘relief in case
of oppression’. In the present case, we have already given directions with the view to put an end to the acts of oppression
complained of. Therefore, when the respondents and the
company have expressed their unwillingness to purchase the shares of the petitioners on
account their financial position, we do not think it would be proper to direct them to do
so. This Board has also, in Vinod Kumar Mittal V Kaveri Lime Industries Ltd (2000 36
CLJ 174), did not pass any order for purchase and sale of shares when both the
sides expressed their financial difficulties to mobilize funds towards consideration for
the shares. In spite of our findings that in the present case, sale and purchase of shares
need not be ordered, considering the fact that the parties are at draggers drawn and every
action by the company is being questioned by the petitioners in their capacity as
shareholders, in the larger interest of the
company, the performance of which, according
to the respondents is improving, we suggest that it
would be in the interest of the respondents
themselves, to purchase the shares held by
the petitioners at a fair price to be determined by the statutory auditors of the company. However we are not giving
any direction in this regard in view of the financial difficulties expressed by the
respondents and leave the option to them to do so and in case, the respondents opt to
purchase the shares of the petitioners, they should be informed of the same within a month
from the date of receipt of this order. The
petitioners have demanded that the valuation should be based on the worth of the company
in 1989. The normal principle followed in valuation of shares in a 397/98 petition is that
the date of the petition is always taken as the date
of valuation and in other proceedings this
Bench has adopted the Balance Sheet
date proximate to the date of the petition for valuation purposes. Since this petition was filed in November 1994,
the date of valuation has to be 31.3.1995, being the proximate balance sheet date. The
fair price of the shares will be determined by the statutory auditors of the company on
the basis of the Balance Sheet as on 31.3.95. The statutory
auditor of the company, before determining the fair value, will give hearings to both
the sides and once the fair value is determined by the auditor, the same will be binding
on the parties. The valuation should be completed within
4 months of the respondents communicating their decision to purchase the shares. The consideration for the shares at the fair
value determined will be paid within 3 months from the date of the valuation report and on
receipt of the consideration, the petitioners will hand over blank instruments of transfer
to the respondents along with the share certificates, duplicates of which, we have already
directed for issue within a month. In case,
the respondents are not willing to purchase the shares of the petitioners, the same should
also be communicated to the petitioners within a month. Thereafter, the petitioners are at liberty to apply for such
number of shares that would restore their percentage holding of the equity shares to
22.09%. Once the petitioners express their desire to do so, then the respondents will be
bound to get that number of shares transferred from their group on receipt of
consideration for the same at par at which the shares were earlier allotted. In case of
all future issue/allotment of shares, the petitioners should be offered shares on a
proportionate basis by registered post Ack.due.
(S.Balasubramanian)
(A.K.Banerji)
New Delh, the 27th
day of January 2001.