TMI Blog1982 (10) TMI 165X X X X Extracts X X X X X X X X Extracts X X X X ..... from the management of the company, to direct the second respondent to make good the loss illegally pocketed by him out of the sale proceeds of the 53 acres of estate and to appoint an administrator to look after the affairs of the company. The main allegations against the respondents were: ( i ) that 53 acres of rubber estate were sold without valid necessity, (2) dividends were not declared to create a situation of inducing the minority shareholders to part with their shares, (3) slaughter tapping and double tapping were resorted to unnecessarily and the amounts derived from them were not accounted in the books of the company, (4) timber trees were cut and sale proceeds were not accounted, (5) the son of the secretary was appointed as superintendent removing the then incumbent adopting an improper procedure, and (6) the workers of the company and its smoke house were used for the purpose of the son's estate. Though the petitions raised various other grounds also, the learned judge considered only such of the allegations as were pressed before him at the time of hearing. Six witnesses were examined on behalf of the petitioners and two on behalf of the respondents. A commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... One Joseph Chacko was the founder of the company. The main asset of the company is the rubber estate known as Pazhuthadam Rubber Estate with a planted area of over 450 acres. P.W. 4 is a grandson of the founder. In C.P. No. 19 of 1974, the allegations were mostly directed against the secretary and also P.W. 2. P.W. 2 is the son of the secretary's maternal grandfather. The old superintendent R.W. 1 was also related to the founder. The parties are in one or the other way related to one another. The petitioners put forward their case on the basis that they belonged to the minority group of shareholders and that by various acts the majority group was oppressing them. According to them, they were denied access to the books of the company, the books were manipulated to suit the convenience of the directors and the affairs of the company were conducted in a manner harmful to the interests of the company. The case of the petitioners is denied by the company. According to the company, there was never any attempt to acquire weak shares at low value, reserves were built up for being used in re-plantation, that during the relevant time when the impugned transactions took place the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs they do not. In some respects they resemble agents, in others they do not. In some respects they resemble managing partners, in others they do not. The House of Lords considered various authorities dealing with this question, and it was decided that the powers of the directors were in some sense fiduciary in relation to the company. On the facts of that case, directors who had made some profits by virtue of their position involving a cinema house and a subsidiary company, it was held that the rule of equity which insists on those who by user of a fiduciary position make a profit should account for it, is not dependent on fraud or absence of bona fides but by virtue of their position as trustee. In Selangor United Rubber Estates Ltd. v. Cradock [1968] 2 All ER 1073 (Ch D) the first question of law discussed was how far the directors are trustees of the company's funds and while answering this question, the discussion proceeded on the assumption that there existed a fiduciary relationship between the director and the company which is clear from the following observation (p. 1091): It is clear and not disputed that they owe a fiduciary duty to the company to apply i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ellants put forward on this basis is that once the fiduciary relationship mentioned above is accepted, the burden to satisfy the court of the good faith in transactions, the bona fides of which are questioned by a shareholder, shifts to the director and that the shareholder need only adduce some prima facie evidence. For this purpose, strong reliance was placed on section 111 of the Indian Evidence Act. It is useful to read the section itself before considering the scope of its operation: 111. Proof of good faith in transactions where one parly is in relation of active confidence. -Where there is a question as to the good faith of a transaction between parties, one of whom stands to the other in a position of active confidence, the burden of proving the good faith of the transaction is on the party who is in a position of active confidence. Normally, the law presumes prima facie in favour of deeds duly executed. Therefore, when the validity of a transaction on the ground of fraud, undue influence, etc ., falls to be decided imputing bad faith, the burden is on the person who challenges it. The exception to this rule comes where fiduciary relationship subsists between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not answerable to any one for what it does, but a company is answerable to the Government as well as to its shareholders when the directors act against the provisions of the Act and to the proved detriment of the company or its shareholders. If the appellants' contention is to be accepted, any shareholder can throw some mud at a director by filing an application like the one filed in this case, adduce some evidence and then insist upon the company to satisfy the court that the allegation is not correct and thus stifle the activities of the company. The learned judge was not prepared to accept the evidence adduced as sufficient to substantiate the allegations made against the directors, indirectly holding that the burden of proving the allegations satisfactorily is on the petitioners. On a careful consideration of this contention, which we have permitted the appellants' counsel to argue before us, though not raised before, we hold that the burden to satisfactorily establish the accusations against the directors is upon those who question their validity and there is no reversal of burden as contemplated in section 111 of the Indian Evidence Act. One other question of law a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itself of the validity or the bona fide nature of the grounds set forth in the petition in supplementation to the evidence already on record. The respondents' counsel submits that this is totally impermissible and that section 246 cannot be pressed into service for admitting the report obtained as per a direction under section 237 in an appeal from the judgment in which such a direction was given. He took us through the various sections of the Act in reinforcement of this submission and to satisfy us of the use to which such a report can be put under the Act. According to him, the learned company judge becomes functus officio once a direction under section 237 is given. He cannot be invited to look into a report submitted pursuant to such a direction after the main petition is disposed of. If his jurisdiction is so restricted, the jurisdiction of the appellate court would be also similarly restricted. In other words, if examination of the contents of the report by the judge who gave the direction is not permissible in law, a court sitting in appeal over the judgment will also be not permitted to look into that report. According to him, the provisions of the Act lay down how the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 401, by any person authorised by it in this behalf. The attempt of the appellants before us is to make use of the report in a manner not contemplated by the Act. The report could be made use of only by the Central Government in the manner provided in section 243. Section 244 provides for proceedings being taken for the recovery of damages if from any such report as aforesaid, it appears to the Central Government that proceedings ought, in the public interest, to be brought by the company or any body corporate whose affairs had been investigated. The scheme contained in the above provisions makes it clear that a machinery is provided to use the report that an inspector submits after investigation into the affairs of the company either at the instance of the Central Government or at the instance of the court. A direction by a court to appoint an inspector for investigation into the affairs of the company is necessitated only when the court finds it difficult to pass an effective order in an application under section 397 or section 398. To use such a report at the appellate stage to displace the order of the original court would be to set at naught the effect of the various provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r in their hands after receipt of the report of the inspector and do such things as are necessary and expedient in public interest..........It should be, however, remembered that once an inspector is appointed and the inspector, after enquiry, submits a report, it is for the Central Government to act, and it is no longer open to a person, who prompted the court to issue an order under section 237( a )( ii ), to call upon such court after the investigation report of the inspector, to consider the said report once again and give him such reliefs which, according to him, he is entitled to. This is not provided under the Act......... What remains in this connection is the application filed by the appellant in M.F.A. No. 96 of 1981 as C.M.P. No. 19643 of 1982 under O. 41 r. 27 for reception of the report as additional evidence. What is produced is a copy of a copy. There was some controversy before the learned vacation jude when the matter came before him about the admissibility of the copy. We do not think it necessary to consider the question, nor to examine whether the application to admit additional evidence is based on satisfactory grounds, for the reason that we have already ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the board meeting recorded in Ext. B1 during the relevant period when the sale took place will have to be looked into to appreciate the rival contentions regarding the sale. PW-2 was appointed manager of the estate on April 12, 1972. This decision was taken at the meeting of the board held on April 12, 1972. At the meeting of the board on November 7, 1973, RW-2 and PW-2 furnished an estimate of the immediate financial requirements for the estate, which included funds for clearing off an overdraft liability and for day-to-day working, payment of provident fund arrears, installing a motor and putting up of workers' quarters. The board felt that there was no possibility of getting loan on reasonable terms. This led to the decision to sell a part of the estate described as immature, non-yielding poor area. A block of 53 acres was pointed out by PW-2 as poor and hilly. The board thereupon authorised PW-2 and RW-2 to contact prospective buyers and report. At the next meeting held on January 12, 1974, PW-2 and RW-2 submitted a detailed report about prospective buyers. Some offers were also produced. The board discussed the matter and authorised PW-2 to execute sale deeds at the ra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ixed after negotiations by PW-2, that it was PW-2 who arranged for the execution of the documents and that he was giving false evidence deliberately. The learned judge felt that the above evidence gave room for suspicion that all was not well with the transaction. According to him, the consideration of ₹ 12,000 shown in Exts. A-1 to A-33 for the rubber estate, eight miles away, in 1975 and ₹ 5,000 shown in 1975 for the estate in question gave room to suspect whether the documents in question showed the correct consideration. Even so, the learned judge felt that he was unable to find sufficient evidence to hold that the area was actually sold at ₹ 12,500 per acre and that the secretary had pocketed the difference. The learned judge was not prepared to accept the version given by PW-2. He held that PWs. 1 and 4 had only hearsay knowledge, thereby holding that the allegation under this head was not proved beyond doubt. The respondents' counsel found fault with the observations made by the learned judge about the disparity between the consideration in the document in question and Exts. A-31 to A-33 to be abnormal, and stated that the evidence clearly indicated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o not think it necessary to go deep into the case of P.W. 2 of the alleged forged signature of the chairman because, according to us, that is only a desperate attempt at this stage to explain the adverse circumstances against him. We have looked into the minutes book ourselves. We find the signature of the chairman, who is no more, in the minutes of the meetings at which he presided. We find the signature of the successor-chairman in the meetings at which he presided'. The minutes book, as already stated, is a book the maintenance of which the Companies Act insists. If Ext. B1 is accepted, it has to be found that P.W. 2 knew at all relevant times about the proposal to sell 53 acres of land and that he had taken active part in the negotiations and the ultimate execution of the sale deed. His evidence that the actual consideration was ₹ 12,500 and that this amount was paid in the presence of the Registrar cannot, for a moment, be accepted. There was no reason why he should have been a mute spectator when ₹ 12,500 per acre changed hands while actually the document showed only ₹ 5,000 per acre as consideration. Nobody has been examined to prove the actual payment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t voluntarily. He wanted better terms. The board did not accede and hence he resigned. All these are evident from the minutes of the board meeting held on January 12, 1974. His shares were purchased by P.W. 2 and his wife. Therefore, the case of exerting pressure on R.W. 1 and the alleged removal cannot persude us to hold that it was done to accommodate P.W. 2's son and cannot pass muster in view of the evidence of R.W. 1 himself. One other allegation was that the secretary and his group were keeping share certificates with them in order to prevent transmission of shares in favour of the legal representatives of deceased shareholders. This allegation is not supported by any evidence. Not even a single case had been mentioned though an attempt was made to say that the signature of the former chairman in some share transfer forms was different from the admitted signature. The learned judge felt unimpressed by this case because some of those transfer forms were used to transfer shares in favour of P.W. 2 himself. Another important allegation made by the petitioners is that dividends were not declared for a long time with the avowed intention of compelling the minority sharehold ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were bogus, and was only to deplete the funds of the company and for undue enrichment of the secretary. The learned judge was not impressed with these allegations. No acceptable evidence was adduced to substantiate the case of bogus reservations. Building up reserves cannot be characterised as mismanagement. Companies sometimes require it. In the absence of acceptable materials, we are in agreement with the learned judge holding that this allegation has not been made out and cannot be pressed into service in support of an application under section 397 or section 398. The two other remaining allegations related to double tapping and slaughter-tapping. The allegation about double tapping is that though double tapping was carried on, the yield therefrom was not accounted, and that payments to the workers under this head were not entered in the company's accounts, the suggestion being that the respondents were appropriating the extra yield to themselves. According to the respondents, double tapping was never resorted to. Sometimes, extra tapping was arranged and that too when the season was favourable and the yield good. Without giving any importance to the nomenclature, we see ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the petitioners have made out a case on this ground. The company came into existence in 1910. Rubber plantation began in 1912. There is evidence to show that the rubber board recommended replanting the estate in 1960 with better plants. Slaughter-tapping started somewhere in 1952 and was completed in 1970. During 1952-1971, the process of replanting went on. From 1962 onwards slaughter-tapping was being arranged directly by the company itself and sometimes through reliable contractors. According to the respondents, it is not necessary to invite tenders always. It is for the board of directors to decide as to how the slaughter tapping is to be done. The complaint that the entire income from slaughter tapping was being suppressed has not been satisfactorily made out. The learned judge observed that the audited balance-sheet produced showed that at least part of it was being accounted for. He was not prepared to accept the evidence in this regard. He felt that the petitioners should have adduced better evidence especially because P.Ws. 2 and 4 who were directors during a long period would have been in the know of things at that time. We have examined the evidence ourselves. We f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1 himself has deposed that the resigned the job voluntarily since the company did not favourably respond to the terms that he put forward. Regarding the method of appointment of the third respondent also, a detailed discussion is not necessary since at the time when he was appointed, P.W. 2 was very much in the picture and his appointment was after due publicity. The second allegation against him is that workers of the company and its smoke-house were used for the purpose of his estate in the adjoining area. This case cannot be true because the estate of the third respondent has its own smoke-house. That the services of the workers were availed of for the estate of the third respondent has not been satisfactorily proved. The only attempt made is to construct a case on certain note books and diaries, Exts. A-1 and A-14 and A-15 to A-17 seized by the tax authorities, where there is some noting about a 45th Block. No one connected with these note books and diaries was examined. Whether this 45th Block is third respondent's estate or not, is itself a matter not free from doubt. The allegation has not been satisfactorily made out nor is the evidence sufficient to hold that the res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcising its powers under the section. Delay and acquiescence in the acts complained of will also be circumstances against the grant of reliefs. The powers of the court under section 402 are wide. But the courts have always exercised restraint in interfering with the affairs of the company, for the affairs of the company are normally its own concern and the concern of its shareholders. It is only when the facts and evidence before the court are such as to persuade it to hold that interference with the affairs of the company is necessary that it would exercise its powers. The interest of public good will always be kept by the court in mind. But the concept of public interest will preponderate over the autonomy of a company and the management under the articles of association and within the confines of the provisions of the Companies Act, only if such evidence is available before the court. Stray cases of mismanagement or even a few cases of mismanagement without sufficient proof will not lead a court to entrust the powers of the management of a company in the interest of public good, to strangers appointed by the court. Disgruntled shareholders there will always be. Courts will not l ..... X X X X Extracts X X X X X X X X Extracts X X X X
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