TMI Blog2015 (7) TMI 298X X X X Extracts X X X X X X X X Extracts X X X X ..... ng years showing RKK as holder 1,025 shares under Folio No. 96 were signed by MMK which shows that MMK was also aware of the transfer of 1,025 shares held by MKK to RKK under the family arrangement. I accordingly hold that pursuant to the family arrangement and as agreed therein, MMK after receiving the Machinery Division to the complete exclusion of RKK had given his 1,025 shares under Folio No. 96 to RKK who in turn delivered the same to MMK who was admittedly the custodian of all the share certificates in HCM for completion of necessary legal formalities relating to transfer of such shares. The fact that under the signature of MMK, i.e., the Patriarch, and the person exercising the supervisory and controlling powers in HCM the annual returns for all subsequent years reflected RKK as the holder of 1,025 shares even though under the same Folio No. 96, the inference that shares held by MKK were agreed to be transferred to RKK is irresistible. I hold accordingly and direct HCM to rectify its register of members and to register transfer of 1,025 shares held by MKK under folio 96 in favour of RKK. In view of the above findings the petition by MKK is, in my considered opinion, actua ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ghter-in-law Alka Kejriwal (AK) P-2 have filed a petition under sections 397, 398, 399, 402, 403, 406 and 409 of the Companies Act, 1956 ('the Act') alleging acts of oppression and mismanagement in Hanuman Cotton Mills Ltd. ('HCM') by the elder son Ramesh Kumar Kejriwal R-2 (RKK), his wife Mrs. Saroj Kejriwal (SK) R-4 and their son Ankit Kejriwal (ANK) R-3. Wellcast Products (P.) Ltd. (WC) R-5 a company promoted by RKK and Mr. Ranendra Nath Sen (RNS) whose appointment as an additional director in HCM is under challenge, have also been impleaded as R-5 and R-6. 2. Admittedly one Pratpmtull Bagaria and members of his family promoted HCM on 12th July, 1952 and continued to run the affairs of HCM till 1989. HCM owned a valuable asset, i.e., approx. 24 acres of land situated at Railway Station Road, Fuleswar, P.O. Uluberia, Distt, Howrah. The said land was, at all material times used by Shree Hanuman Foundry Engineering Co. Ltd. (HF) a sister company of HCM on a monthly rent of ₹ 30,000 payable to HCM. 3. It is not disputed that the Kejriwal Family had carried out five registered partnership firms as under : (a) Subhadra Trading Co. (b) Murari Mohan A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the last page of the annual return filed by HCM for the year 1999 bears the signatures of MKK and the annual return filed by HCM for the year showing appointment of ANK as an additional director also bears the signature of MMK. 7. It is also not disputed that dispute and differences having arisen between MKK and RKK in 1996, with the intervention of Dr. V.K. Kejriwal (VKK) uncle of MKK and RKK a family arrangement ('FA') was arrived between them under which the day-to-day administration and business of HF was to be looked after by RKK and the machines (belonging to the partnership business) was to be handled by MKK. The FA was signed and accepted by MMK, MKK and RKK. Admittedly the business of HCM dwindled between 1997 and 2005 and losses were reported. It is also admitted that MKK had stood personal guarantor for the loan advanced by Vysya Bank to HF. 8. According to the petitioners, in or around the year 1996 irreconcilable disputes and differences arose by and between MKK and RKK, inter alia, on account of failure to settle diverse dues of HCM under the management of RKK as a result whereof uncle VKK intervened and was able to formalise a family arrangement (F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d taxes including electricity charges, as a result whereof, the petitioner No.3 was constrained to pay taxes amouting to ₹ 50,000 in or about January, 2005. (iv) clear the liabilities of Vysya Bank Ltd. Or redeem the mortgage of the aforesaid land of the said company notwithstanding the fact that all the other assets of the said Hanuman Foundry were sold ostensibly for payment of dues of the said Bank. 10. It is further alleged that on or about 3rd February, 2005 there was an assertion of right by RKK before MMK that all the shares held in the capital of HCM by the petitioners group must be transferred to RKK and SK. This request was denied by MMK on the ground that HF was entrusted to RKK merely for the purpose of running the day-to-day affairs of HF and the question of transfer of the shares held by the petitioners group in HCM or HF to RKK and his family did not and could not arise. 11. Strangely the petitioners allege that later on 11th February, 2005 MMK was shocked to find that all the share-scrips in the capital of HCM and HF were missing from his almirah. Upon intervention by his brother VKK, RKK returned and restored possession of all the share-scrips in HCM ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e on all the last pages of the annual returns, RKK deceived MKK by allowing MKK to continue as director in HCM. 14. The petitioners allege that the/said transfer of 1,025 shares held by MKK under Folio 96 to RKK is void because no transfer deed was executed by MKK in favour of RKK, no consideration was paid to MKK and MKK continued to be a director in HCM till 2004. Even the custody of 1025 shares held by MKK continued to be with MMK. 15. The petitioner further alleges that with Form 32 filed by RKK on behalf of HCM with the ROC, MKK is shown to have tendered his resignation as director of HCM with effect from 7th June, 2004. It is further alleged that the said Form No.32 was signed by MMK on a representation by RKK that it was required for statutory' filing before RoC under the act. 16. The petitioners alleged that as MKK continued as a director of HCM till 7th June, 2004 he was under the belief that he also continues to be a shareholder of HCM. The searches carried out by MMK and MKK with the RoC on 13th and 16th January, 2006 proved it wrong. 17. It is further alleged that during the period MKK remained on the Board of directors of HCM, RKK convinced MMK to induc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... endment and Form 23 (Annexure A4) were filed on 22nd September, 2005. Before the purported extraordinary general meeting the legality and validity whereof is under challenge no Board meeting was or could have been held. The petitioners were not informed about the aforesaid Board meeting or the aforesaid EGM alleged to have been held at the Registered Office of HCM. The Form 23 filed under the Act reveals that it appears, the said company purported to have held, yet, another, EGM on 17th May, 2005 under section 81(1A) of the Act, inter alia, issuing equity shares of ₹ 10 each, aggregating to a sum of ₹ 12.50 lakh, on preferential basis to such persons or class of persons as the Board might decide in accordance with Unlisted Public Companies (Preferential Allotment) Rules, 2003. No notice whatsoever was sent or forwarded to any members of the petitioners' group with a view to depriving the petitioners of their legitimate right, flowing from the provisions of the Act as also appropriate provisions of tire AoA of the said company and also to reduce the petitioners' group to a minority. 22. It is further alleged that the purported Explanatory Statement issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the said respondent No. 5 has been, and is, for all intents and purposes are an alter ego of the respondent No.2 The activities of the respondents are hostile and adverse to the interest of the respondent No. 1. In the premises, the aforesaid issue and allotment of shares unto, and in favour of, the respondents' group and/or coterie have been, and are, illegal and void. 25. It is further alleged that under rule 9 of the aforesaid Rule 2001, the Explanatory statement accompanying with the notice of the meeting at which the resolution was or is proposed to be passed did not disclose the rate of voting right, which the equity' share capital with differential voting right shall carry as also the scale or in proportion to which the voting right of such class or type of shares will vary . As a consequence thereof, the old equity shareholders holding shares of ₹ 100 each as paid-up share capital will have the same and/or similar voting right amongst the new allottees who have paid ₹ 10 for each equity share; Xerox copies of the Form-23 and Form 2, respectively, filed by' he respondent No. 2 with the RoC, West Bengal, along with the purported resolutions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h by HCM in its capial : Name No. of Shares (1) Ramesh Kumar Kejriwal, respondent No. 2 herein 95,000 (2) Smt. Saroj Kejriwal, Wife of respondent No. 2, respondent No. 4 herein 1,30,000 (3) Welcast Products (P.) Ltd. Respondent No. 5 herein 2,00,000 29. The petitioners also allege that RKK in violation of the provisions of the Act appointed the cashier, Shri R N Sen, (RNS) the respondent No.6 herein, on the Board of directors of HCM on 7th September, 2005 without his having any qualifying shareholding in the HCM in violation and infringement of the provisions contained in the AoA of HCM. Petitioners allege that for the appointment of Sh. R N Sen no Board meeting was convened or held, nor any notice whatsoever was served on the petitioners' group or the petitioner No.1, who, admittedly has been.a director of HCM at the relevant time. In the premises, admittedly, there was no quorum even if assuming that such Board meeting was ever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the Foundry work independently which includes the business of HCM as it only had a Foundry Unit besides HF and a partnership Firm Shree Venkatesh Tea Industries. The Foundry Unit of HCM situated at Fuleswar, PO Uluberia, Distt. Howrah and the Foundry unit of HF and the abovementioned partnership firm are situated at the same premises. Under the family arrangement RKK was to take complete charge of the Foundry work (including the business of HCM) while MKK was to take complete charge of the machine work with assets and liabilities of the machine division. 32. The machinery division had various earth-moving machines like excavators, cranes, dowsers, dumpers, etc. Pursuant to the family arrangement these machines were transferred by MKK to his own companies, Parijat Vyapar (P.) Ltd., Bhawati Construction Co. and a number of other unregistered entities. The asset of Parijat Vyapar (P). Ltd. in its balance sheet of 2001-02 and 2003 Annexure R3 substantiates the above. 33. It is further stated that pursuant to the FA the resignation of MKK from HCM was not obtained, immediately so as not to jeopardise the ongoing settlement with the ING Vysya Bank Ltd. which was the main Banker o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fact that MKK had ceased to be a director with effect from 7th June, 2004 was also recorded which bears the signature of the patriarch, i.e., MMK. 35. Regarding the appointment of ANK as Director in HCM from 10th February, 2004 it is stated that even the Form 32 dated 10th February, 2004 Annexure R9 filed with the RoC in that regard was signed by the patriarch MMK. 36. Regarding the preferential allotment of shares it is stated that before May, 2005 the company was in need of capital for the purpose of carrying out levelling work and construction of boundary wall for its property at Fuleswar, Howrah where the Foundry unit of the company was situated. Money was also required for litigation expenses to pursue the proceedings filed by the company against ING Vysya Bank and also to proceed against local miscreants who were trying to illegally obtain possession of the company's land. Therefore, pursuant to the Board meetings held on 8th April, 2005 and 25th August, 2005, in the EGM held on 17th May, 2005 and 19th September, 2005 it was decided to issue shares to RKK, SK and WC. In two EGMs held on 17th May, 2005 and 19th September, 2005 preferential allotment of shares were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The respondents have averred that the authorised share capital of the company is ₹ 50,00,000 divided into 50,000 shares of ₹ 100 each and that total issued and paid-up share capital is presently ₹ 49,50,000 divided into 7,000 equity shares of ₹ 100 each and equity shares of ₹ 10 each and that pursuant to the FA RKK holds 2,275 equity shares of ₹ 100 each and 95,000 equity shares of ₹ 10 each, SK holds 800 equity shares of ₹ 100 each and 1,30,000 equity shares of ₹ 10 each in the capital of HCM and Wellcast Products (P.) Ltd. (WC) holds 2,00,000 equity shares of ₹ 10 each. According to the respondents, allotment of shares in the capital of the company on 17th May, 2005 and 9th September, 2005 is in accordance with law and in terms of the provisions of the Act. 40. As regards the losses sustained by the partnership business of the Kejriwal group it is stated that the business dwindled drastically after a change in the policy of the Government to use concrete sleepers in place of cast-iron sleepers. 41. Respondents have also filed an affidavit of VKK and others regarding interpretation of the FA drawn on 29th Septembe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 002 it is not open to either party to take a contrary plea thereto at this stage. 42. As regards custody of the share certificates of MKK it is stated that these were handed over by MMK to RKK after the family settlement was recorded in September, 2002. However, at the instance of MMK and VKK these share certificates were handed over to MMK for the purpose of endorsement of the shares to record the said transfer of 1,025 shares held by MMK and 700 shares held by HF. It is stated that MMK was also fully aware of the transfer of 700 shares held by HF to ANK as he had signed the form No.32 for appointment of ANK as an additional director in HCM and had also signed the annual reports from the years 2000 to 2004 showing 1025 shares under Folio No.96 in the name of RKK. ANK was appointed as an additional director on the Board of HCM on 10th February, 2004 and had acquired the qualification shares (60 equity shares) on or lout 22nd March, 2004 from Smt. Shakuntala Kejriwal. 43. The consideration of ₹ 70,000 for transfer of 700 shares held by HF to ANK was paid by cheque No.801007 dated 2nd February, 2005 on Hongkong Shanghai Banking Corporation. The transfer of 700 shares h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion was to be done by MMK as both sons, i.e., MKK and RKK were to provide monthly accounts to the father, i.e., MMK. (iii) Clause 4 read with clause 11 clearly depicts that the object of the family arrangement was only the liquidation of debts and to bring the family out of the mess. Admittedly the family remained joint in mess and residence. (iv) Another important factor which runs counter to the theory of complete partition in the' family is that even after the family arrangement MMK continued to be a shareholder and director in HCM and did not transfer his shares to RKK. RKK never applied for transmission of shares held by Savithri Devi late wife of MKK. Even AK, wife of MKK, did not transfer her shareholding in HCM in favour of RKK. (v) MMK was not called upon at any point of time to resign as director in HCM or transfer his shares in favour of RKK. There is no reference whatsoever regarding transfer of ownership of land owned by HCM exclusively in favour of RKK. The object of the family arrangement appears to be to clearly demarcate the management of the two divisions, i.e., foundry' division, i.e., HF and HCM and machinery division between RKK and MKK. (v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... c. (vii) The respondents have also filed documents to substantiate that the business of HCM was only in respect of foundry and HCM did carry the business of foundry. A perusal of Annexures R10, 11, 12 and 13 leaves no room for any doubt that at the time of the family arrangement in 1996 HCM was carrying on business in foundry. It was argued that the documents mentioned above do not show that HCM was doing foundry business in 2002, when the family arrangement was reduced to writing. However, this does not help the petitioners since the situation as prevailed in the year 1996 or before had to be seen. The above documents leave no room for any doubt that HCM was doing foundry business and several invoices were raised by HCM for supply of foundry items which were signed not only by MMK but also by MKK. Several letters issued by HCM evidencing business of foundry being carried out by HCM have been filed. Even the balance sheets for the years 1996 and 1998 of HCM (Annexure R12) evidence sale of items from the foundry. It was argued on behalf of the petitioner that HCM having surrendered its Sales Tax Registration Certificate (both Central and State) on 13th September, 1999 and also it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares under folio 96 which supports an inference that under the family arrangement he had agreed to transfer his 1,025 shares under folio 96 to RKK. MKK was better placed under the FA since he not only got the complete control over the machines division the liabilities thereunder were to be shared by both, i.e., MKK and RKK. On the other hand, so far as HF is concerned, the entire liabilities fell on the shoulders of RKK. HCM had no liabilities. 48. I accordingly hold that under the family arrangement arrived in June 1996 and reduced to writing in September, 2002 MMK agreed to get detached from HF and HCM while accepting a better deal which he got by taking the Machinery Division. This in no manner should be understood to mean that RKK became the absolute owner of HCM. This could not be, as MMK, AK and other shareholders held shares in HCM. The FA was only intended to give under the supervision and control of MMK the right of management of HCM and HF to RKK and to set out a clear demarcation of responsibilities between MKK and RKK. Transfer of 1025 shares held by MKK to RKK under the family arrangement 49. Considering the intent and purpose of the family arrangement and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lio No. 96 and thereby had ceased to hold any qualifying shares he was continued as a director in HCM till 7th June, 2004 for effectively settling the liabilities of Vysaya Bank deserves acceptance. The petitioners were thus in the knowledge of the fact that they had acted upon the family arrangement inasmuch as the shareholding of MKK in HCM was projected in the annual statement for 1999 in the name of RKK. The annual statements for the following years showing RKK as holder 1,025 shares under Folio No. 96 were signed by MMK which shows that MMK was also aware of the transfer of 1,025 shares held by MKK to RKK under the family arrangement. I accordingly hold that pursuant to the family arrangement and as agreed therein, MMK after receiving the Machinery Division to the complete exclusion of RKK had given his 1,025 shares under Folio No. 96 to RKK who in turn delivered the same to MMK who was admittedly the custodian of all the share certificates in HCM for completion of necessary legal formalities relating to transfer of such shares. The fact that under the signature of MMK, i.e., the Patriarch, and the person exercising the supervisory and controlling powers in HCM the annual retu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ution again fails on the touchstone of there being no quorum for the said Board meeting as required under article 107 of the AoA of HCM and also for want of any evidence of notice to MMK and MKK who were on the Board of HCM on 29th day of March, 2004. It also fails on further scrutiny of the annual return submitted by HCM for the year ending 30th September, 2004 filed before the RoC on 23rd November, 2004. In such annual return Shakuntala Devi Kejriwal is shown to be the holder of 70 shares even though the said annual return projects ANK's appointment as Additional Director with effect from 10th February, 2004 in HCM. Thus the appointment of ANK as an Additional Director in HCM on 10th February, 2004 and the acquisition of the qualifying shares, by ANK in HCM also fail on the acid test of the AoA of HCM and the provisions of the Act mentioned above. 55. Section 300 of the Act prohibits a director of the company from taking part in the discussion at the Board meeting if he is in anyway, whether directly or indirectly, concerned or interested in the resolution sought to be passed. His presence shall also not count at such Board meeting for the purpose of forming a quorum, at a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petition which clearly discloses that HCM had already surrendered their sales tax registration certificate on 13th September, 1999 and excise registration certification on 30th December, 2002. In the absence of both, there could not have been any expansion plans in HCM. I am of the considered opinion that EGM dated 17th May, 2005 depicts the beginning of a systematic plan by RKK to reduce MMK and other shareholders of HCM to an abject minority by allotting shares only to his group which amounts to an act of self-aggrandisement and a harsh, burdensome and oppressive act. In the abovementioned situation the increase in the authorized capital of HCM and allotment of shares under the Unlisted Public Companies (Preferential Allotment) Rules, 2003 on 17th May, 2005 and 19th September, 2005 is liable to be struck down as being with an intent to reduce patriarch MMK and other shareholders not belonging to the group or RKK to an abject minority and to gain complete control over the assets of HCM in a mala fide manner. The resolution passed at the EGM held on 17th May, 2005 and on 19th September, 2005 are thus liable to be set aside not only for the above reasons but also for the reason tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... et aside. 60. CP No. 31/2006 is, therefore, partly allowed. My Findings on issues arising in this petition are summarised as under : (1) MKK is not entitled to any relief in this petition as having divested his entire shareholding in HCM, i.e., 1,025 shares held by him under folio no. 96 in favour of RKK in the year 1999 he had ceased to be a shareholder in HCM. (2) The family arrangement arrived in June, 1996 between MKK and RKK was intended solely to bring a complete demarcation of management responsibilities of the respective Divisions, i.e., the Foundry' Division (inclusive of HCM) and the Machinery Division between the two brothers, i.e., RKK and MKK. Separation, of MKK from HCM was thus essentially intended under the family arrangement. (3) Pursuant to the family arrangement MKK who was better placed under the family arrangement had transferred the entire machinery received by him to his company Parijat Vyapar (P.) Ltd. and others, the value of such machineries being in excess of the value of the land owned by HCM. (4) Under the family arrangement, ownership of land owned by HCM was not intended to be transferred to RKK who along with patriarch MMK and othe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , even otherwise no legal right to remain on the land of HCM. I, therefore, direct RKK and WC to remove the entire construction by WC (R- 5) on the land of HCM within two months from the date of this order at their own cost. If this is not done a special officer shall be appointed by this Board for ensuring compliance of this order. 62. In view of the findings recorded by me the shareholding in HCM on the date of the petition would be reflected as under : Folio No. No. of Shares A. MMK 98 1040 B. Late Savitri Devi (Wife of MMK) 97 1000 C. RKK 100 96 2275 D. SK (wife of RKK) 105 860 E. MKK - - F. AK (wife of MKK) 99 768 G. HF 70 700 H. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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