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TMI Blog2010 (10) TMI 923X X X X Extracts X X X X X X X X Extracts X X X X ..... e removed from the directorship of the company and further declare that the appointment of respondents Nos. 4 and 5 as directors of the company is null and void ; direction that the affairs of the company be investigated in terms of section 237(b) of the Companies Act, 1956 ; further attentively to prayers (a) to (c) declaration is sought that it is just and equitable to wind up respondent No. 1 company. 2. M/s. Rewanchal Industrial Security India P. Ltd., was originally incorporated in the name of M/s. B. S. A. Industrial Security India P. Ltd., in or about September, 1996. Thereafter, in May 1998, the name of the company was changed to its present name, i.e., M/s. Rewanchal Industrial Security India P. Ltd. The authorised share capital of the company is Rs. 5,00,000 comprising of 5,000 shares of Rs. 100 each. The issued share capital of the company is Rs. 4,64,000 comprising of 4,640 shares of Rs. 100 each. 3. My attention was drawn to Form No. 2 dated February 16, 1999, signed by respondent No. 2 showing the petitioner's shareholding at 1,500 shares respondent No. 2 group's at 1,620 shares and respondent No. 3's group at 1,620 shares. Drawing my attention to article 23 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of respondent No. 1. From February 16, 2004, the petitioner voluntarily stopped attending the office; articles 21 and 23 are not applicable as the registration of respondent No. 1 company with the Directorate of Resettlement was only for a period of four years, which expired on September 30, 2001; the petitioner did not hold 33.33 per cent. share capital in respondent No. 1 company ; the petitioner was given a loan of Rs. 1,90,000 on June 25, 2001 and thereafter a further loan of Rs. 10,000 on October 22, 2001. Both these loans have not been repaid; the petitioner ceased to be a director under section 283(1)(h) read with section 295 of the Act. 7. Counsel for the petitioner pointed out that till date, no dividend has been declared by the company. Moreover, the PBDIT shown by the company as compared to its turnover is markedly low and appears to have been deliberately understated. A company with an annual turnover of above Rs. 2 crores is shown to have earned net profit of Rs. 7.5 lakhs. This is patently frivolous. The respondents have not denied the mismanagement and have admitted, inter alia, sale of the jeep by respondent No. 2 to his son ; purchase of property from the father-i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ight to issue shares to one director may technically be there, but the question whether the right has been exercised bona fide and in the interest of the company has to be considered in facts of each case and if it is found that it is not, so, such allotment is liable to be set aside. Reliance was placed on the case of M.S.D.C. Radharamanan v. M.S.D. Chandrasekara Raja [2008] 83 SCL 451 (SC), to contend that in view of the provisions of sections 397, 398, 402, 433 and 443 of the Companies Act, ordinarily, in a case where oppression has been made a ground for the purpose of invoking the jurisdiction of the Company Law Board in terms of sections 397 and 398 of the Act, a finding of fact to that effect would be necessary to be arrived at. But, the jurisdiction of the Company Law Board to pass any other or further order in the interest of the company, if it is of the opinion that the same would protect the interest of the company, must be held to be existing and the Company Law Board is not powerless in this regard. Reliance was placed on the case of Tarlok Chand Khanna v. Raj Kumar Kapoor [1983] 54 Comp. Cas. 12 (Delhi), to reiterate that certificates of posting are readily available. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors should be given. In the absence of a proper notice, the meeting itself is not valid. Accordingly, the operation of section 283(1)(g) and vacation of office by the petitioner cannot be upheld. 11. The respondents' case is that pursuant to the efforts of respondent No. 2, respondent No. 1 company was incorporated on September 19, 1996, having authorised share capital of Rs. 5,00,000 with 5,000 shares each of Rs. 100 originally as BSA Industrial Security India P. Ltd. Respondent No. 2 along with his family and friends subscribed 1,437 equity shares and contributed Rs. 1,43,700 whereas the petitioner remitted a sum of Rs. 36,300 for 363 shares of Rs. 100 each. It was specifically denied that subscribed share capital of the company was Rs. 4,64,000 in any proportion whatsoever at any point of time. Respondent No. 1 company got registered with the Directorate General Resettlement, Army vide their letter dated October 1, 1997. The said registration was valid for 4 years and expired on September 30, 2001, with the expiry of registration with the Directorate, it was no longer obligatory for respondent No. 1 company to adhere to the policies which were specifically incorporated in the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ferred the present petition. Reliance was placed on the case of Vinod Kumar Mittal v. Kaveri Lime Industries Ltd. [2000] 23 SCL 176 (CLB-New Delhi), to show that in that case : "The Company Law Board declined to interfere with the removal of the director as an act of oppression since it was established that the petitioner had acted against the interest of the company by writing complaints to various Government authorities resulting in their conducting raids on the company." 14. Further, it is submitted that the removal of the petitioner does not qualify the test of oppression as defined under section 397 of the Act, as laid down by the Supreme Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 35 Comp Cas 351 (SC). The observations of the Supreme Court are as follows (page 366) : "It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e board of directors with his mala fide intentions to appropriate the respondent-company's funds for his personal use. However, the said account was not closed by the bank authorities as the petitioner failed to produce the board resolution to that effect. 18. It was argued that the petitioner is further liable for taking illegal advantage of his position as he made bogus allotment of shares in his name and, in order to support his contention that he was actually holding 1,500 shares since 1999, he has annexed Form No. 2 along with his petition. It was contended that the said document is an overt proof of the mala fide intentions of the petitioner as the said form had been accepted by the authorities with late fee on April 13, 2004, i.e., after the petitioner was in receipt of the notice dated April 2, 2004. Thus, the said document is not conclusive and is unreliable. Moreover, the fact that the said allotment is bogus is further proved from the fact that no money had actually been transferred to the account of the company which fact can be corroborated from the balance-sheet as well as the statement of the company's account(s). Reliance was placed on the case of Hemant D. Vakil v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i P. Gaekwad [2005] 57 SCL 476 (SC) to show that : "The question of oppression for the purposes of sections 397 and 398 of the Companies Act arose. Their Lordship held that the remedy under section 397 of the Companies Act is not an ordinary one. The cause of oppression had to be burdensome, harsh and wrongful and an isolated incident may not be enough for grant of relief and continuous course of oppressive conduct on the part of majority shareholders was, therefore, necessary to be proved." 22. The court further observed (page 631 of 123 Comp Cas) : "It has to be borne in mind that when a complaint is made as regards violation of statutory or contractual right, the shareholder may initiate a proceeding in a civil court but a proceeding under section 397 of the Act would be maintainable only when an extraordinary situation is brought to the notice of the court keeping in view of the wide and far-reaching power of the court in relation to the affairs of the company." 23. It was contended that the petitioner's allegation that respondent No. 2 in connivance with respondent No. 3 illegally transferred one of the two jeeps owned by the respondent-company, the registered office of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its of the company as no share in the profit has been paid to him since the incorporation of the company, it was contended that no dividend was ever declared by the respondent-company till the petitioner was involved in the administration of the company as in charge of its accounts and therefore, the question of denial of share in the profits does not arise. Moreover, the dividends were not declared on account of the understanding among all its directors, i.e., petitioner and respondents Nos. 2 and 3, as to re-invest the entire money into the business carried out through the company. It was argued that the petitioner is now stopped from making such contentions and turn back from his consent, which is evident from the fact that the petitioner being in charge of accounts of respondent No. 1 company did not lodge any complaint with the appropriate authority at that time and now is raising the belated pleas on account of his mala fide intentions. 27. To support their contentions the respondents relied upon the case of Desein (P.) Ltd. v. Elektrim India Ltd. [2001] 32 SCL 393 (CLB-New Delhi), wherein while adjudicating upon the grievance of the petitioner regarding appointment of statu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nexplicable delay and laches in approaching the Company Law Board by filing such petition and alleging acts of oppression and mismanagement at a belated stage, the Company Law Board can refuse to entertain such a petition on the ground of delays and laches . . . 15. When we discuss the question of delay and laches what is to be examined is as to whether the person approaching the court was sleeping over his right and was negligent in pursuing the remedy the real test to determine delay is that the lapse of time is not attributable to any laches or negligence on the part of the petitioner..." 30. The petitioner in his petition has not prayed for relief as to declare that the affairs of respondent No. 1 company are being mismanaged or conducted in an oppressive manner and therefore, the present petition is merely a directorial complaint. Further reliance was placed on the case of Shoe Specialities (P.) Ltd. v. Standard Distilleries & Breweries (P.) Ltd. [1997] 90 Comp Cas 1 (Mad) ; to show that (page 30) : "While exercising the powers under sections 397 and 402 of the Companies Act, the court is considering not only the relief that is sought for, but also considers as to what is t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d the rival submissions and the case law cited by the parties. It is noted that respondent No. 1 company was incorporated to provide security services to industries under the sponsorship from the Ministry of Defence in their rehabilitation programme. There are three groups, the petitioner's group, respondent No. 2's group and respondent No. 3's group, each holding one-third shares. The petitioner was a director, his group including his wife and son held 1,500 shares. He was removed from directorship in 2004 by a resolution passed on April 26, 2004, giving the reasons that the petitioner had closed the bank account. The petitioner's contention is that this account was never closed, it is still continuing and the respondents have taken different and contradictory stands for removing him from directorship. The petitioner has denied having approached the Oriental Bank of Commerce for closing respondent No. 1 company's account. It has been rightly pointed out by the petitioner that as per the resolution the petitioner was removed on April 26, 2004, whereas in the reply in their pleadings the reason given for his removal by the respondents was that the petitioner stopped coming to office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot proceeded on proper norms, the respondents were required to submit a proper report which was submitted by the respondents on August 4, 2009, being the report by Shri Hari Om Agarwal, chartered accountant showing valuation by different methods at Rs. 2,540 per share, Rs. 2,032 per share, Rs. 1,693 per share and Rs. 2,263 per share. It was contended that if average of this valuation is taken at Rs. 2,000 per share the petitioner is willing to go out on receipt of 30 lakhs (1,500 shares A-2,000 per share). However, the respondents were willing to offer only Rs. 5 lakhs and are willing to be sold out at of Rs. 2,000 per share to which the petitioner did not agree. The petitioner being the minority shareholder is willing to go out and is not in a position to buy out a company from which he was removed in 2004 and thereafter respondents Nos. 2 and 3 groups which were in management had converted the profit making company into a shell company. 36. There is no quarrel with the case law relied upon by the respondents. But each case turns on its own facts. In the present case the respondents have failed to controvert the petitioner's allegations of contradictions and illegality in his rem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 408 of the Act is that there must be a nexus between the complaint made and the reliefs granted ; the statutory provisions contained in sections 397, 398, 402 and 403 of the Act confer a statutory right to the shareholders and can only be invoked before the Company Law Board ; the said provisions are an alternative to winding up and deal with public interest, the representative cause of the shareholders and derivative cause of the company. It is well-settled that the purpose and object of sections 397 and 398 is to put an end to acts of oppression and mismanagement promptly and speedily in a summary manner. The proceedings under section 397/398 are beneficial provisions to get the grievances redressed without recourse to winding up of a company since such winding up would be prejudicial to the interests of the members. It is no doubt true that sections 397 and 398 give ample powers to the court to pass necessary orders under section 402 compelling even purchase of shares, or the interest of any member of the company, by other members and for passing any just and equitable order so that a solvent concern could continue working in cases where the affairs of the company are conduct ..... X X X X Extracts X X X X X X X X Extracts X X X X
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