TMI Blog1994 (5) TMI 270X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of the petition has been ascertained as 11 and as such the minimum number of shareholders was available to maintain the petition. Though the respondents have contested in reply the maintainability on the basis of the enhanced capital, it was not pursued by them. The respondents in this case apart from the company include Dr. S.L. Hendre and Mrs. Manek Hendre who are the chairman and managing director respectively of the company. Though two more respondents were sought to be added, there was no proper application from the petitioners in this regard. 2. According to the petitioners from the inception of the company, i.e., February, 1970, the affairs were conducted as if it was a partnership with three groups, namely, Wazirs, Gogtes and Kalverts, i.e., the petitioners. In or about April, 1991, the Wazir group and the Gogte group purportedly entered into an agreement with Hendres for selling their entire shareholding in the respondent company amounting to 78 per cent. without the knowledge of the petitioners. On this agreement there now exist several legal proceedings between the parties. Consequent to the above agreement the petitioners were left alone with the Hendre group and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es defaults were committed. The bank thereafter instituted a suit in the Bombay High Court against the respondents and the petitioners in February, 1992, for recovery of a sum of ₹ 71.64 lakhs along with further interest at 25 per cent. per annum with quarterly rest. The bank had also applied for an order of attachment of the premises of the company. An ad interim order was passed by the Bombay High Court on March 18, 1992, appointing the court receiver for the mortgaged securities and hypothecated goods. An undertaking was also given on behalf of the company that the office premises would not be disposed of or encumbered. According to the petitioners, on June 18, 1992, the company at the instance of the Hendres have obtained a decree in the suit and the company has filed an undertaking to maintain the hypothecated goods and at least ₹ 10 lakhs. 3. The respondents also intimated to the petitioners about the shifting of the registered office of the company to Panvel, District Raigarh outside the limit of Bombay city to which the petitioners protested. The petitioners have also come to know that several suits have been filed against the company after the Hendres have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ismanagement and the company is left with practically no employees. It is further alleged that the statutory meetings of the company are not being held and the annual accounts not being made up. The meetings of the board are being got up and the minutes fabricated. The entire business of the company has come to a standstill and the substratum of the company has gone. Respondents Nos. 2 and 3 have also purportedly increased the authorised capital of the company without following any of the procedures prescribed. The petitioners have, therefore, contended that it is just and equitable and necessary to wind up the company but doing so would unfairly prejudice them. 4. The petitioners have prayed for orders for changing the management of the company by appointment of an administrator and/or independent committee ; removal of respondents Nos. 2 and 3 ; restraining respondents Nos. 2 and 3 from operating bank accounts or borrowing ; directing the respondents to render complete accounts ; relocating the registered office to its original location and restoring the office premises to its original shape. 5. At the hearing held on October 20, 1992, an undertaking was given on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ital fact that the company's factory had been closed by them in February, 1991. After the true picture of assets and liabilities as on March 31, 1991, became known, the respondents could not be expected to pay such a high price of ₹ 200 per share for a share of the nominal value of ₹ 10. The respondents made it known to all the three parties that they would be willing to pay a price equivalent to the true net worth of the share. 7. According to the reply, there was a board meeting on April 25, 1991, in which the petitioners were present and the transfer of shares from the Wazir group to the Hendres were approved and respondents Nos. 2 and 3 co-opted as directors and appointed as chairman and managing director respectively. At the meeting held on April 29, 1991, the transfer of shares from the Gogtes was also approved at which meeting the petitioners walked out and the first petitioner deleted from the minute book their names and the sentence that they had walked out and the same was initialed by respondent No. 2 as chairman. 8. The contention that the registered office was wrongfully and illegally shifted first to Peddar Road (the residence of the Hendres) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o avoid the appointment of a receiver temporarily, subsequently, the court appointed a receiver for the property charged to the bank, i.e., the factory premises and other assets located therein and, accordingly, the receiver has taken possession. The respondents in good faith attempted to avoid the appointment of the receiver for the factory by trying to sell the Bombay property and hence shifted the registered office to Panvel. The liabilities have devolved on the company due to the commitments made by the previous management consisting of the petitioners and the other two groups. The petitioners have instigated the creditors after the new management took over whereas no such proceedings were started before the take over by the new management. The petitioners have suppressed the full facts with regard to the suit decreed in favour of the Bank of Maharashtra by the High Court. In fact, in the suit filed by the Bank of Maharashtra the petitioner had given notice of motion which was dismissed by the High Court stating that they have no locus standi in the matter and the petitioners went in appeal and the appellate court reverted the case to the learned single judge to decide on the m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... azir group in terms of the consent decree, 12. As per our directions, the petitioners were given inspection of the statutory records and, thereafter, a rejoinder was filed. It was brought out in the rejoinder that between June, 1991, and May, 1992, the respondents have purportedly convened and held six extraordinary general meetings. These meetings are illegal and records have been got up and/or fabricated to show the holding of meetings. The notices and explanatory statements indicate not only violations of company law and also self-contradictory. An examination of the register of contracts showed various omissions and commissions. The entire entries in the register relate to renting out the company's premises at cheaper rates to the respondents' own parties and charging exorbitant rent and deposit from the company for use of the premises of the respondents. All these acts are in violation of Sections 299 to 303 of the Companies Act. It is also found that the paid-up capital was increased by ₹ 90 lakhs by fresh issue of shares on three dates July 9, 1991, September 13, 1991, and March 27, 1992. Out of the total issue of ₹ 90 lakhs, ₹ 73.5 lakhs was for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly to the respondents and transfer of shares in violation of the articles of association ; (e) utilising the company's properties for personal benefits and embroiling the company into various litigations thereby mismanaging the affairs of the company. 14. Elaborating on the above, the learned advocate, pointed out various discrepancies noticed from the inspection. He stated that the respondents have already admitted that there exists a correction in the minute book with regard to the meeting of April 29 which was also admittedly initialled by respondent No. 2. However, during the hearing the original minutes book produced was found to be totally different and there was no correction of minutes and no initialling was evident. With regard to the assertion of the respondents that notices were sent under postal certificate, during inspection the certificates of posting produced did not bear any postal stamp or cancellation thereof. Subsequently, after about two months, the respondents produced the stamped certificates, all from one post office at Bandup, Bombay, which is located far away from the registered office, whereas a post office is available very close to the register ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , and, accordingly, they have ceased to be the directors as per Section 283(1)(g) of the Companies Act, 1956, and Article 94(i) of the articles of association. He pointed out that respondent No. 2 himself in his letter dated March 30, 1992, has admitted the presence of the petitioners in the board meeting held on April 29, and June 17, 1991, though for a while. The request of the petitioners for inspection with regard to the notices of board meetings was also not granted. He further stated that petitioner No. 1, had given standing instructions in writing as early as in 1973 to send registered acknowledgment due notices. He further stated that the respondents had fabricated documents with regard to the cessation of the petitioners as . directors. They have filed conflicting returns with the Registrar of Companies first in May, 1991, stating that they had resigned on April 25, 1991, and again on July 30, 1991, with regard to joint managing directorship on the same grounds though admitting that petitioner No. 1 is continuing as non-executive director. However, by another return dated February 7, 1992, the Registrar of Companies has been informed that both the petitioners have vacated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... spondents for 1991-92 though reflects increase in the capital does not give any details of issue for consideration other than cash. Further these shares were exclusively allotted to the respondents, without any offer to the other shareholders which is in violation of Article 8 of the articles of association. 19. As regards misuse of the company's properties Shri G. Devitre cited after inspection, instances of the properties of the company being let out to the respondents' own companies at nominal rent with nominal deposits. In addition they are charging ₹ 10,000 per month for locating the registered office of the company in their own premises. Further substantial sums have been siphoned off on account of the purported remuneration to themselves as directors and the purported interest to alleged creditors. Besides this the respondents have also embroiled the company into various litigations with regard to the sale of the registered office of the company and non-payment of creditors' dues. 20. Shri M.R. Lal, advocate, appearing on behalf of the respondents, emphasised that the petitioners have not come with clean hands. The petitioners have mismanaged the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e effect immediately after the happening of the event and the petitioners cannot invoke Section 397 to remedy the situation. There was no removal or restraint placed by the respondents but a pure and simple vacation of office. 23. As regards the failure to present the original list of addressees without the postal stamps it was a mere lapse on the part of the employees. As regards posting of the letters at the Bhandup post office, since there was no check on the staff while going out, one of the staff members residing in Bhandup area was instructed to do the posting with an allowance of leaving the office an hour earlier. There is no law which prevents posting letters from any post office and the respondents enjoying 78 per cent. voting power had no cause or reason to be afraid of the presence of the minority at the meetings. On the legal issues of posting of letters, the presumption is that if a letter properly addressed is proved to have been posted, it reached its destination and was received by the person to whom it was addressed. 24. With regard to the shifting of the registered office and allegation of destruction of fixtures in the office premises, he stated that it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e consideration agreed to was ₹ 225 lakhs whereas the outstanding debts of the company stood at more than ₹ 200 lakhs at that time. In addition, other dues of workers and the State Electricity Board were also to be settled. Hence there was no personal advantage for the respondents. 27. It was also stated on behalf of the respondents that the general principle of law laid down in Foss v. Harbottle [1843] 2 Hare 461 that the courts will not interfere in matters of internal administration should prevail. It is for the majority to decide the manner in which the affairs of the company are to be conducted. The court only intervenes in very exceptional cases, that is where there is fraud or oppression. 28. It was also argued that the case is not one of deadlock in the company and as such there is no ground for winding up. Thus where the shareholding of the two groups is substantially disproportionate the principle of partnership or removal of deadlock will not apply. Shri Lal, therefore, concluded that the petitioners do not deserve any relief of any kind whatsoever. 29. We have carefully considered the petition, the reply, counter reply and the arguments advanced fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cts submitted, it is evident that from April, 1991, to February, 1992, there was a period of suspense since an understanding was reached between the two parties for the sale and purchase of shares. It is also evident from the petitioner's own submission that even in February, 1992, they had been following up with the respondents for payment for the shares, obviously, when the petitioners were following up the payment, they could not also have insisted on exercising their rights arising out of the shareholding, namely, membership rights and rights as directors. It is, therefore, understandable that petitioner No. 1 did not enforce his authority as joint managing director or insist on attending the board or general meetings. The resignation of the petitioners as directors is also not on record and hence their vacating office due to resignation also did not arise. The fact remains that as per the records of the company, the petitioners were directors as well as shareholders. Since the deal regarding shares was already clinched it is also understandable that the respondents could have ignored the formality of sending notices to the petitioners, as members/directors. That by itself, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced in the notice dated June 17, 1991, which had along with it an explanatory statement dated July 9, 1991, which actually is the date of the alleged meeting. The most glaring evidence of fabrication is the indication of the address of the registered office in the notice dated June 17, 1991, namely, 63, Peddar Road, Bombay, whereas, admittedly, the registered office was shifted to this address only in August, 1991. There is no convincing reply to all these allegations excepting an excuse of lapse on the part of the staff. The petitioners also drew our attention to the posting of the notices from a particular post office in Bhandup which is far away from the registered office though a post office was available nearby. They also drew our attention to the fact that originally in inspection the list of addresses was shown without the postal stamps duly cancelled. After two months, however, the respondents produced a stamped certificate of posting. According to the respondents, there is no law which prevents the company from posting its letters from any post office if it suited its convenience or that of its employees. They have also justified the non-production of the stamped and cance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of April and June, the petitioners were present though for a while. Thus, the grounds for vacation of office of directors have not also been conclusively established. The petitioners have also drawn our attention to the decision of the Supreme Court in Parmeshwari Prasad Gupta v. Union of India, AIR 1973 SC 2389 ; [1974] 44 Comp Cas 1, to state that even if notice was not given to one of the directors, the resolution passed at such a board meeting is not valid . In view of the above we are convinced that the board and the general body meetings of the company held during the period from April 29, 1991, were not duly convened and all those meetings are invalid. 33. With regard to the grievance of the petitioners of removal from directorship and fabrication of records to show their exit, as already referred to, the respondents themselves had admitted that the petitioners were present at the meetings on April 29, and June 17, 1991. The vacation of office under Section 283(1)(g) of the Companies Act for non-attendance of three consecutive board meetings has not been substantiated since details of further board meetings after July, 1991, were not submitted before us. It is also esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directors without making any offer to the existing members. The complaint, therefore, is two-fold, namely, failure to issue notice of relevant extraordinary general meeting and failure to make a pro rata offer to the existing equity shareholders. The question of failure to issue notice has been already dealt with by us. As regards the other question the petitioners drew our attention to Article 8 of the articles of association which is reproduced below : 8(i). Where at any time after the expiry of two years from the formation of the company or at any time after the expiry of one year from the allotment of shares by the company made for the first time after its formation, whichever is earlier, it is proposed to increase the subscribed capital of the company by allotment of further shares then : (a) such further shares shall be offered to the persons or corporate bodies, who, at the date of the offer, are holders of the equity shares of the company, in proportion, as nearly as circumstances admit, to the capital paid up on those shares at that date ; (b) the offer aforesaid shall be made by notice specifying the number of shares offered and limiting a time not being less t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s well-established that directors of company are in a fiduciary position vis a vis the company and must exercise their power for the benefit of the company. If the power to issue further shares is exercised by the directors not for the benefit of the company but simply and solely for their personal aggrandisement and to the detriment of the company, the court will interfere and prevent the directors from doing so. The very basis of the court's interference in such a case is the existence of the relationship of a trustee and of cestui que trust as between the directors and the company. 38. In Gluco Series Pvt. Ltd., In re [1987] 61 Comp Cas 227, the Calcutta High Court has also observed that the court will scrutinise with particular circumspection any issue and allotment of shares by which existing balance of power in a company is disturbed. In Sindhri Iron Foundry Pvt. Ltd.'s case [1964] 34 Comp Cas 510, the Calcutta High Court has categorically stated that a single wrongful act alone could constitute oppression, as in the present case by increasing the 78 per cent. majority to 98 per cent. It is also noted that out of the total issue of 90 lakhs, ₹ 81.5 lakhs (in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not raise this objection when the Wazir group and the Gogte group transferred their shares to the respondents. We are not, however, convinced of these justifications of the respondents inasmuch as on the date of transfer the relevant provisions of the articles being as they are, any transfer in violation of the articles amounts to denying a privilege available to the petitioner shareholders. The potential of the respondents to amend the articles, cannot by itself be taken as a justification for violating the articles. Even if such a potential is actually used to amend the articles it can by itself be a ground of oppression. Though we have not admitted the two transferees as additional respondents, we hold that the approval of the transfer by the board of directors of 200 shares is not valid. 40. The petitioners' complaint of deliberate shifting of the registered office against the interests of the company and for the personal benefit of the respondents has been considered. It is evident that the respondents have complied with the legal requirements of filing the necessary returns with the Registrar of Companies in this connection. As already discussed, the notices for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stablish that the terms were unfavourable to the company nor have the auditors reported so in their report when they are required to so indicate. As regards siphoning off the funds the respondents state that they have not taken any funds other than their legitimate dues as remuneration. They have also justified the payment of salary to themselves as they are required to attend courts, conferences with solicitors/ advocates, attend the court receiver's office, etc. However, their justification on the counter-allegation that petitioner No. 1 was receiving remuneration as joint managing director for more than 20 years cannot by itself constitute a justification against siphoning off funds. Though the fact of withdrawal of funds on account of remuneration or expenses has been stated by the respondents, the petitioners have not established as to how the withdrawal of legitimate dues would constitute mismanagement. Accordingly, we do not express any view in this matter. As regards the allegation of the respondents embroiling the company in innumerable litigations we are not convinced about this allegation since the various litigations are a consequence of transactions entered into by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4. The reliefs sought by the petitioners mainly are- (1) dislodging the respondents from the management of the company ; (2) appointment of administrator and/or independent committee of management ; (3) independent audit of the accounts ; (4) re-locating the registered office to its original location. 45. While considering all the above reliefs the undisputable fact that the respondents hold 78 per cent. of the share capital cannot be ignored. The petition itself states that the petitioners did not want to associate themselves with strangers and hence wanted to get rid of their shares. During the final hearing, the petitioners also expressed their readiness to sell their holdings provided the payment is assured. As such to put an end to the complaint of oppression the appropriate solution is for the respondents to buy out the petitioners. This is in line with the decision in Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] 29 Comp Cas 1 (HL) ; [1958] 3 All ER 66 and of the Division Bench of the Calcutta High Court in Ramashankar Prosad v. Sindri Iron Foundry (P.) Ltd., AIR 1966 Cal 512, in similar circumstances. This is also in line with the provisions of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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