TMI Blog2006 (8) TMI 586X X X X Extracts X X X X X X X X Extracts X X X X ..... not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents through their manipulations. To safeguard the interest of the financial institutions who chose to fund such a prestigious project in the interest of the country and to do substantial justice between the parties, I order as follows: I. The resolutions of the R-1 company removing the P-1 and the P-2 from directorship and appointing R-3, R-4, R-5 and R-6 as additional directors are hereby declared as null and void and status quo ante is restored. II. Since nothing has been placed on record to show the need of the company for further investment and hence need for allotment of additional shares, I hold the action of increase in the share capital and allotment of additional shares to be totally malafide, only motive being to gain control of company, hence increase in the share capital and allotment of additional shares is hereby set aside. III. To safeguard the interest of financial institutions namely, the Technology Development Board, Department of Science and Technology, Ministry of Science and Technology, Technology Bhawan; Ministry of Food Proc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... jointly promoted by P-2 and R-2 by subscribing 2,100 equity shares of ₹ 10/- each. As per the records of the Registrar of Companies the authorized share capital of the company at present is ₹ 7,45,00,000/- divided into 74,50,000 equity shares of ₹ 10/- each and the issued and subscribed capital of the company is ₹ 7,36,15,000/- divided into 73,61,500 equity shares of ₹ 10/- each. Petitioner No. 1 holds ₹ 5,93,300/- of ₹ 10/- each (fully paid) and petitioner No. 2 holds 24,100 equity shares (fully paid) including holding 2,100 equity shares by subscribing to the Memorandum and Articles of Association of the company. The petitioners jointly hold 6,48,300 equity shares of ₹ 10/- each. Respondent No. 2 and Petitioners No. 2 were the first directors of the company w.e.f. 23.10.2000. Petitioner No. 1 was appointed as Director and Managing Director of Respondent No. 1 company vide Board's resolution dated 23.7.2002. The Respondent Company is engaged, interlaid, in the business of dehydration, irradiation process, preserving of all kinds of agricultural, horticultural and food items of every description by way of chemical or cobolt-60 nuc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 when no Board Meeting/General Meeting was possible, as per the certificate at Annexure E at page 29 because R-2 was already hospitalized Saroj Hospital Heart Institute, Rohini, Delhi for operation on 4.2.2004 and was discharged only on 14.2.2004. Such cessation of office of director of petitioner No. 2 amounted to oppression to the petitioners. Further, it was averred that in the annual return as on 30.9.2003 filed with the Registrar of Companies the respondent NO. 2 incorrectly showed the shareholding of Petitioner No. 1 as 59,330 equity shares instead of 5,93,300 equity shares thus fraudulently reducing the Petitioner No. 1's shareholding to 10% of his actual shareholding. The Respondent No. 2, it was pointed out, had tactfully used the above mistake to make unreasonable gain and cause damage to the petitioners by representing the shareholding of Petitioner No. 2 to a nominal amount and representing virtually the total shareholding of the company to his name. Further, it was pointed out that the petitioner No. 1 and 2 are not being paid their agreed managerial remuneration in the company amounting to ₹ 30,000/- each w.e.f. October 2004 to petitioner No. 1 and from O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs' letter out to the respondent No. 2 that he had misled them and despite the petitioners complaint to the Bank about the irregularities in the utilization of the funds and request to the bank that they should not release the funds in the best interest of the company, the bank continued releasing the funds. Furthermore, it was pointed out that Respondent No. 2 shifted the bank account of the company to the bank of his choice stating himself and respondent Nos. 3, 4 ,5 and 6 as authorized signatories without mentioning the names of the petitioners with the clear objective of isolating and ruining the petitioners. Further, it was pointed out that on the basis of mutual consensus and understanding between petitioners and the respondents it was decided in the Board Meeting dated 23.7.2002 that petitioners and respondents will have 50% of the equity capital of the company. That resolution had not been adhered to till date and no shares have been allotted to the petitioners except the following: Name of the shareholding No. of shares allotted Date of allotment Smt. Bina Sharma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompanies Act, 1956. The petitioners were aggrieved because they had no information about the deployment of the funds, they had no access to the books of accounts. They had to file Civil Suit No.85/2005 in the Delhi High Court for rendition of accounts. The suit is still pending. Refuting the charge of forum shopping the counsel argued vehemently that they were in no way pursuing various legal proceedings against the respondents. In fact, the petitioners have been running from pillar to post to bring an end to the mismanagement and oppressive conduct of the respondent NO. 2. The petitioners had tried their level best to inform and seek help of the bankers, other Govt. authorities and the Registrar of Companies before approaching the Hon'ble Company Law Board in the best interest of the company and have approached the CLB only after getting disappointment from every side because of the respondent No. 2 being a very influential person. The Registrar of Companies had not taken any action on their complaint dated 1.3.2004. However, after several reminders the ROC sent the matter to the Regional Director, Kanpur. It was pointed out that nothing has been done even by the RD, Kanpur ti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o would convene general meetings of the company for appointment of new Board of Directors to take charge of the affairs of the company and for vesting management of the company in the said Board; declaration of further allotment of shares as void; allowing of petitioners further equity shares against their share application money permitting to invest in 50% of the equity capital of the company; taking away of the control and management of the company from respondent Nos. 2 to 6; and removal of petitioners from directorship of the company to be declared as null and void. 4. Shri M. Dutta, counsel for the respondents argued that the petition is not maintainable as the shareholding of the petitioners comprises of 8.81% only, their shareholding being ₹ 6,48,300/- equity shares of ₹ 10/- each. It was pointed out that as per the Annual Return dated 29.9.2004 (Annexure R-4) the total authorized share capital of the company is ₹ 7.45,00,000/- consisting of 74,50,000 equity shares of ₹ 10 each and R-1's issued/subscribed and fully paid up capital is ₹ 7,36,15,000/- comprising 7,36,500 equity shares of ₹ 10 each, and hence, invocation under Sections ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... government organizations including banks and financial institutions resulting in tarnishing the image and goodwill of the respondent company and hampering the progress of the respondent company by their illegal and unwarranted actions which have been undesirable and unjustified. It was pointed out that the petitioners have indulged in forum shopping and have not disclosed the facts of initiating other proceedings in the petition which is a mandatory requirement under the Company Law Board Regulations 1991. It was pointed out that the petitioners vilification campaigns in the form of complaints not only tarnished the image of the company but also affected its growth, working and profitability. Knowing the conduct of the petitioners the Chairman and Managing Director of R-1 company namely, Shri Dwaraka Nath (R-2) wrote a letter dated 4,2.2003 to the Registrar of Companies requesting the Registrar to keep the respondent company's file in safe custody and not to take on record any documents pertaining to the respondent company which does not bear the signature of the Chairman and Managing Director of the company. However, despite such letter dated 4.2.2003 Petitioner No. 1 managed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sence of any challenge to the said resolution no further grievance can be addressed by the petitioner No. 1. Shri M. Dutta relied on the decision in Hanuman Prasad Bagri and Ors. v. Bagrees Cereals Pvt. Ltd. and Ors. to submit that directorial complaints cannot be agitated by way of Sections 397/398 of the Companies Act. Shri Dutta further argued that the petitioners invoking Sections 397/398 of the Act have failed to meet requirements of the said Sections. It was pointed put that for all purposes the complaint has failed to allege any instance/incident that can be termed even remotely to be an act or instance prejudicial to the interest of the company or a member. Furthermore, Board's attention was drawn to the so called Board Meeting dated 23.7.2002 on which the petitioners relied on the basis of mutual consensus and understanding that petitioners and respondents will have 50% of the equity capital of the company. It was pointed out that this document cannot be relied upon. It has not been adhered to till date and no shares have been allotted to the petitioners in compliance with the so called resolution dated 23.7.2002 as the said documents, have been sought to be cancelled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n. It was further pointed out that when the financial irregularities were found by the board the powers given to the petitioner were withdrawn and a notice to this effect was published in the Punjab Kesari on 9.3.2004. It was pointed out that there is no question of paying managerial remuneration to the petitioner as till date no director has taken any remuneration from the company as the directors have been working on honorary basis. In, fact, the petitioner No. 1 during his tenure as managing director had been wrongfully withdrawing money as salary from the account unilaterally without the permission of the Board. Shri Dutta further argued that no reliance can be placed on the petitioners' affidavit dated 20.3.2006 alleging certain incorrect and wrong conduct as the petitioners did not seek permission to remove certain defects in his case by seeking permission to file certain affidavits/interim applications including affidavit dated 20.3.2006. Even otherwise it was argued by way of abundant precaution by Shri Dutta that all averments/allegations made in the said affidavit are wrong, incorrect and illegal. The counsel vehemently and emphatically denied these averments/allegati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... objection that the petitioners hold less than 10% of the total issued, subscribed and paid up capital of the company, the petitioners have claimed holding of 6,48,300 equity shares of ₹ 10/- each. This Board has always taken the view that if shareholding of the petitioners is reduced below 10% on account of further issue of shares and if the issue of further shares is also challenged in the petition, then, the petition will not be dismissed as not maintainable in terms of Section 399. Instead, the allegations relating to the issue of further shares would be examined first as to whether the same is an oppressive act and if it is found to be to then only other allegations in the petition would be examined. In the present case, the petitioners' plea is that the respondents had very cleverly proceeded to make a malafide and intentional change in the shareholding. It has been alleged that the respondents started with their nefarious design when the petitioner No. 1 was illegally removed and that before the illegal removal of the petitioners on 30.9.2002 and 3.2.2004 the total paid up capital of the respondent company was ₹ 2.7 crores as per the annual return filed with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... p would not be in the interest of the petitioners, no relief could be granted under Section 397 of the Act, this Board has been taking a view that this principle cannot be strictly applied in family companies. A reading of that judgment would show that the court, after observing that the petitioners had not established any act of oppression or mismanagement in the affairs of the company further observed (para 3 at page 394 of Comp LJ). Therefore, we have to pay our attention only to the aspect that the winding up of the company would unfairly prejudice the members of the company who have the grievance and are the applicants before the court and that otherwise, the facts would justify the making of a winding up order on the ground that it was just and equitable that the company should be wound up. In order to be successful on this ground, the petitioners have to make out a case of winding up of the company on just and equitable grounds. If the facts fall short of the case set out far winding up petition on just and equitable grounds, no relief could be granted to the petitioners. It found that the only substantive allegation relating to the removal of the petitioner as a direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of relief does not arise. This is what was decided by the CLB in Associated Limestone case. However, it is difficult, if not impossible to lay down specific instances alone would be considered to be acts of oppression. Whether an act is an oppression or not would depend on the facts of a case. Since Sections 397/398, proceedings are alternative to a winding up proceedings, it is not that only those which are considered to be just and equitable in a winding up proceedings to be the grounds in a Sections 397/398 petition. In the Bombay proceedings, the court held that since there was no dead lock in the management, the company could not be wound up on just and equitable grounds. It did not examine whether allegations of oppression had been established. That is why the court itself suggested that the petitioners may initiate the present proceeding under Section 397/398. It is worthwhile referring to George Meyer v. Scottish Cooperative Wholesale Society (1954) Scottish Case 381 - referred to in Needle Industries (India) Ltd. V Needle Industries Newey (India) Holding Ltd. (1982) 1 Comp LJ 1 (SC) : (1981) 51 Comp Case 743 (SC), wherein it was held- Although the words, 'oppressiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or according to one's own will or whim. It has to be regulated by law, allay its rigour advance the remedy and to relieve against abuse. The court, therefore, exercising equity jurisdiction, cannot ignore the well known maxims of equity. Two such maxims are that he who seeks equity must do equity and he who comes into equity must come with clean hands.... There have been allegations and counter allegations. In view of contradictory positions and acquiescence of respondents as is evident in the ensuing paragraphs the petition cannot be dismissed at the threshold. 9. It is settled law that in a case of oppression, a member has to specifically plead on five facts - (a) what is the alleged act of oppression; (b) who committed the act of oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company; (e) and, whether the company is a party to the commission of the act of oppression. On considering the present case on merits, I find that all the five aspects of oppression stand proved. The acts of oppression in the affairs of the company have been listed in detail highlighting how these are oppressive. There is specific averment as to who committed the act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... will be done by Mr. Dinesh Sharma/Mrs. Bina Sharma who are authorized to enter into any control open and operate bank accounts on behalf of the company. Mr. Dwarka Nath will not withdraw, make amendments regarding this resolution. 7. That Dr. Rajesh Sharma and Dr. Sonu Sharma and their heirs and any member of the in laws of Shri Dinesh Sharma or any other person shall not be entitled to any shares in the company whatsoever form. 8. It is decided that the resolution passed by Mr. Dwarka Nath for appointment/removal of Mrs Indira Sharma and Mr. Dinesh Sharma respectively are null and void as the quorum of Board will not be fulfilled neither any notices were issued. As per the Board's resolution dated 23.7.2002 petitioner No. 1 is to be the permanent MD of the company. Respondents claimed his removal as per Board's resolution dated 30.9.2003 and pointed out that resolution dated 23.7.2002 was got signed under coercion and fraud and the same has been challenged in the counter claim filed before the High Court. But the respondents are silent about the Board's meeting held on 15.12.2002 recording the minutes (as produced above) that petitioner No. 1, 2' and R-2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not be upheld. In Needle Industries' case the Supreme Court referred to some old English decision with approval. Punt v. Symons was quoted (at SCC P. 394, para 105) in which it was held: Where shares had been issued by the Directors, not for the general benefit of the company, but for the purpose of controlling the holders of the greater number of shares by obtaining a majority of voting power, they ought to be restrained from holding the meeting at which the votes of the new shareholders were to have been used. Piercy v. S. Mills and Co. Ltd. applied the same principle while holding: (All ER p.316 E-E). The basis of both cases is, as I understand, that Directors are not, entitled to use their powers of issuing shares merely for the purpose of maintaining their control or the control of themselves and their friends over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority of shareholding. The principle deduced from these cases is that when powers are used merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company, the same cannot be upheld. In the present case the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... affairs of the company for his own benefits at the cost, risk and consequences prejudicial to the company and the shareholders by disposing off the assets of the company and converting it into a Shell company. The facts on record show that holding of meetings, increasing share capital, allotting additional shares, appointing directors and removing the petitioners as directors without following proper procedure were wholly unauthorized and invalid and hence have to be set aside. 12. All the above go to show that the conduct of the respondents is burdensome and oppressive to the petitioners and prejudicial to the interest of the company. From the narration of the events as above, the only conclusion that I can come to is that the respondents have not been able to refute the charges of oppression and mismanagement in the affairs of the company, and, therefore, the petition deserves to be allowed. Relief to be granted depends on the facts of a particular case. The facts of the present case are so manifestly against respondents that two opinions are not possible on the aspect of relief. Relief has to be granted in the present case to undo the advantage gained by the respondents thro ..... 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