TMI Blog1998 (3) TMI 536X X X X Extracts X X X X X X X X Extracts X X X X ..... dent company was incorporated in July, 1974, with the object of running a dairy and carrying on business in milk and milk products. It purchased 58.36 acres of land in Noonbal Village of Chengleput District on 19-11-1974. Though it installed pasteurising equipment, it is undisput- ed that the company could not utilise the land for the purpose of growing fodder for the cattle and that the business of the company was closed by the year 1979. All the lands owned by the company had been mortgaged to Bank of Madura from which bank it had obtained loan of about Rs. 35 lakhs. That loan was guaranteed by Udaya Kumar Rajah and V.K. Sundaram, both of whom were signatories to the memorandum of association. Sundaram having also been a director all along, while Udaya Kumar Rajah, according to his claim, was the Chief Administrative Officer till the year 1986 when he became a director and continued thereafter as a director in charge, there being no managing director in the company after 1979. One of the other signatories to the memorandum of association, one Gupta, was the managing director till 12-8-1976 and, thereafter, G.P. Sukumaran, the 5th respondent therein, has been desig-nated as managi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been filed, according to the affidavit of the Registrar. 5. The petitioner, though he was the single largest shareholder till 1979, did not become a director of the company and, in fact, at no point of time, was he a director of the company. Even after 1979, when he was the second largest shareholder, he did not choose to take part in the management of the company; nor did he raise any objection to the manner in which the company was being managed, till 1985. Admittedly, the petitioner and his brother Udaya Kumar Rajah ceased to live together in the year 1983, and, according to the petitioner, they have not been on talking terms since the year 1985. 6. The petitioner has in his evidence stated that his brother offered to buy out his shares at the price of Rs. 7,25,000; but did not do so and that the petitioner is now not willing to sell his shares. According to Udaya Kumar Rajah, he had offered to purchase the shares for Rs. 6 lakhs. 7. The petitioner had attended the EGM that was held on 31-3-1986 at which Udaya Kumar Rajah was elected as a director. Though he claims in his testimony in this proceeding that he had objected to the election, the minutes of the meeting do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at the allotment of shares made to the respondent Nos. 2 and 6 is wholly invalid. The registers of the company, it is alleged, has been manipulated for the ulterior purpose of enabling the 2nd respondent to retain the control and affairs of the company. The petition on that ground alleges oppression. 10. The reliefs sought by the petitioner are, ( i )appoint a receiver to take charge of the affairs of the company; ( ii )declare the 2nd, 6th and 7th respondents as not valid shareholders of 10,000, 50,000 and 10 shares respectively in the company; ( iii) direct the company to hold annual general meetings of the company which have not been conducted for more than six years; ( iv )declare the extraordinary general meeting held on 27-3-1987 as invalid; and ( v )declare that the 2nd respondent is not a director of the company since he does not possess the qualification shares on the date of his appointment as director on 31-3-1986. 11. The allegations made in the petition have been denied in the common statements of the respondent Nos. 1, 2 and 3. Petitioner has examined himself as P.W. 1 and the second respondent has examined himself as R.W. 1. Petitioner has produced ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the respondents, claims of other creditors aggregate to Rs. 10 lakhs for which there is no proof. 15. The respondents have not disputed the fact that the AGM of the company have not been held since the year 1979; that the accounts of the company have not been audited; that the balance sheet, the annual returns and other returns have not been filed with the Registrar of Companies after 1979, and that those in charge of the company, for their failure to file returns, had been prosecuted. The respondents, however, contended that there was no mismanagement in effecting the sale of the equipments which had become either unusable or had no utility to the company, as the company had stopped the business even as early as in the year 1980 and the primary concern of the company thereafter was only the repayment of the loans obtained by it from the Bank of Madura. The respondents have also contended that there is no illegality in the allotment of shares to U.K. Rajah and his wife and that they have been lawfully on the board of directors and they are entitled to continue as shareholders and directors. It is the case of U.K. Rajah that though the books produced by him show that he has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he company from 36 persons as also the advances obtained from a builder, an alleged tenant and advance against the sale of the land. The first entry is dated 1-5-1979. It is significant that all the entries for the period from 1-5-1979 to 28-4-1986 are in the same handwriting and in the same ink. It is obvious that this book has been prepared some time after 28-4-1987, and entries upto date having been made by one stretch. The entries after 1-5-1986 are in the same ink and in the same handwriting. There in nothing to show that this loan register was at any time audited. The loan ledger on the face of it does not inspire any confidence as a document maintained by the company in the ordinary course of business. The loans alleged to have been given to the company by U.K. Rajah, and his wife, are mostly written as 'cash received'. Most of the entries are made each month for the same amount and more or less on the same date of the month. The loans allegedly said to have been advanced by Smt. Sivakamasundari are shown to have aggregated to Rs. 3,82,700 on 10-1-1986. That figure is continued on the following page. Further amounts are alleged to have been lent by her and added thereafter o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... given by U.K. Rajah and his wife apart from producing the self-serving and self-created loan ledger which appears to have been written for the purpose of this case. The accounts of the company have not been audited. Though the respondents undertook to produce the audited accounts of the company, they have failed to do so. The allotment of shares treating allegedly outstanding loan as consideration is not bona fide or genuine and it is not possible to accept that the loan as entered in the loan ledger had in fact been given to the company by U.K. Rajah and his wife. The allotment allegedly made to Smt. Sivakamasundari by adjustment of the alleged loan is not even reflected in the loan ledger showing any adjustment and the return was not filed with the Registrar of Companies immediately after the allotment. The minutes of the meeting at which the allotment took place must have been created at a subsequent point of time after the petitioner had given the requisition to hold an EGM of the shareholders for the purpose of removing U.K. Rajah from the position of director and for consideration of the resolution to appoint the petitioner as the director in charge. It is evident that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of their failure to comply with the requirement of law in not holding the AGMs and in not having the accounts audited and in not having filed the annual returns and other documents with the Registrar of Companies. 27. The company has also not maintained proper accounts and the interests of the shareholders are prejudicially affected by the actions of the persons who are now in control of the company. 28. The learned counsel for the petitioner relied on the following decisions of the courts : (1)The case of Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. AIR 1981 SC 1298, was relied on for the purpose of showing what the petitioner is required to do for establishing oppression. The Court in that decision observed that while it may be contrary to law, an isolated act may not necessarily and by itself support the inference that the law was violated with a mala fide intention, or that such violation was burdensome, harsh and wrong- ful. A series of illegal acts following one another, in the context, may lead justifiably to the conclusion that they are a part of the same transaction of which the object is to cause or commit the oppression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge of not complying with the require- ments of section 32 of the repealed (Indian) Companies Act, 1913, and that the person charged with the offence could not rely on his own default as an answer to the charge. (5)In the case of Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 1 Comp. LJ 193 (SC): it was held Inter alia that (at page 204 of Comp. LJ) - "In a petition under section 397 of the Companies Act, 1956, it is not enough to show that there is just and equitable cause for winding up the company, though that must be shown as preliminary to the application of section 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as member and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be conti- nuous acts on the part of the majority shareholders continuing up to the date of the petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the mem- bers. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounts are not ready. (8)In the case of Sishu Ranjan Dutta v. Bhola Nath Paper House Ltd. [1983] 53 Comp. Cas. 883 (Cal), a learned single Judge of the Calcutta High Court held that the continuing managing director and directors whose election is not valid would amount to mismanagement and that the Court can appoint a special officer to manage the affairs of the company, settle the liability and divide the assets as between the two factions which hold shares in the company. (9)In the case of Malleswara Finance Investments Co. Ltd. v. CLB [1994] 81 Comp. Cas. 66 (Mad.), it was held by a learned single judge of this Court that in a proceeding under section 397, where allotment of shares is declared as non est in law, there was no scope for invoking the aid of section 111 and, consequently, all shares illegally allotted would automatically fall to the ground. (10)The counsel also relied on the passage in Palmer's Company Law (21st Edn.) where, under the practice notes, it is stated that where accounts are not available in time for them to be considered at an AGM, the practice was to hold the meeting within the statutory time limit, and transact all business other th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the allegations in the petition are of primary importance, and that prima facie case has to be made before the court could take any action in the matter. (5)The counsel relied on the following decisions of the Calcutta High Court in support of his submission that it is for the petitioner to furnish full particulars of the case pleaded by him and he cannot expect the company to provide the documents, to prove the petition-er's case. Mohta Bros. (P) Ltd. v. Calcutta Landing Shipping Co. Ltd. [1970] 40 Comp. Cas. 119 (Cal), wherein the Division Bench held that when dealing with a petition for relief from oppression or mismanagement made under sections 397 and 398, the court must confine itself to the case as made out in the petition and to the allegations made therein and the supporting affidavits and not look at other evidence with regard to events that might have happened subsequent to the petition. Vague and uncertain allegations of oppression or misman-agement, although they may constitute grounds for oppression, do not entitle a petitioner to ask the court to embark upon investigation into the affairs of the company in the hope that, in consequence of such investig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e can be no limitation on the court's power while acting under sections 397,398 and 402, and that instead of winding up a company, the court has been vested by ample power to continue the corporate existence of a company passing such orders as it thinks fit, in order to achieve the objective by removing any member or members of a company or to prevent the company's affairs from being conducted in a manner prejudicial to the public interest. It was also held therein that the court has the power to supplant the entire corporate management and that the court can give appropriate directions which are contrary to the provisions of the articles of the company or the provisions of the Act, and that on a reading of sections 402( a ) and 402( g ), there can be no doubt that the intention of the legislature was to confer wide and ample powers upon the Court for the regulation of the conduct of the company's affairs and to provide for any other matter which the Court thinks just and equitable to provide for, in the interests of the corporate body and the general public. (9)The counsel also referred to the case of Needle Industries (India) Ltd. ( supra ) . It was Inter alia held there ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r all or any part of the relief which may be found to be appropriate. The fact that a procedure is prescribed for seeking rectification of the register of mem- bers and the fact that power is vested in the Central Government to direct the convening of general meetings, do not come in the way of this Court granting relief in respect of those matters in a petition under sections 397 and 398. 31. The company is now in the hands of the second respondent, U.K. Rajah, who has styled himself as the Chairman and who along with his wife, Smt. Sivakamasundari, the sixth respondent, has inducted others into the board of directors. Neither the 2nd respondent nor his wife, the 6th respondent, are qualified to hold the position of directors. The 2nd respondent had subscribed to 10 shares and that was the extent of his shareholding in the year 1986 when he was elected as the director at the EGM held on 31-3-1986. He had acted as the director for several years prior to that meeting though he had not been elected to that office, in total breach of the provisions of the Act. After his election on 31-3-1986, he could hold the office as director for not more than three months within which time, he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 6th respondent are not entitled to hold the office of the directors of the company. All the directors inducted by them are similarly disentitled to hold the office as directors. 34. The proceedings of the EGM held on 31-3-1987 are declared to be invalid as votes were cast in respect of 60,000 shares, the allotment of which has now been declared as illegal. 35. A receiver is appointed to take charge of the affairs of the company for a limited period of six months within which the receiver shall convene and hold AGM of the company even if the audited accounts cannot be made ready in the meantime. All those whose names are shown in the register of shareholders and who own shares which were allotted to them by the company prior to the year 1980 (the last valid allotment having been made in 1979) shall be entitled to vote at the meeting. The meeting shall be convened after giving the requisite notice to all the shareholders. The 2nd respondent and all other directors of the company shall immediately handover to the receiver all the books and accounts and all records of the company together with a list of all the documents so handedover, a copy of which shall be filed into cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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