TMI Blog2004 (9) TMI 672X X X X Extracts X X X X X X X X Extracts X X X X ..... (f)misappropriation and mis-application of funds and diversion of the business of the Company for personal benefits of the second respon-dent. 2. Shri T.K. Seshadri, learned Counsel, while initiating his arguments submitted that the first petitioner was originally carrying on a sole proprietary concern since the year 1972, dealing in threads and garment accessories, which was converted into the present Company on 27-3-1997 for the benefit of his sons, being the second petitioner and second respondent. The petitioners and second respondent are subscribers to the Memorandum of Association of the Company. The authorized share capital is ₹ 2,00,000 divided into 20,000 equity shares of ₹ 10 each. The issued, subscribed and paid-up capital is ₹ 1,62,000 divided into 16,200 equity shares of ₹ 10 each. The petitioners and second respondent are the only shareholders and they have been the directors since the very inception of the company. The second respondent has been appointed as the first Managing Director. The Articles of Association contemplates that the equity shares of the Company must be held in equal proportion between the petitioners and second responden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent had sent a legal notice on 29-5-2002 informing the first petitioner that he ceased to be a director of the Company with effect from 14-5-2002. At no point of time, the first petitioner submitted any letter of resignation. It is a fabricated document, as borne out by the fact that the said letter of resignation was neither filed along with the main counter statement or counter statement filed in the company application No. 69/2002. Any unlawful exclusion of the petitioners from the management of the Company would constitute an action of oppression in the affairs of the Company. According to the petitioners, the second respondent misappropriated funds of the Company from and out of the receivables realized from M/s. Dust Hakars, M/s. Prakash Garments and others and also cash withdrawals from the bank account to the tune of ₹ 17.84 lakhs out of which a sum of ₹ 10.32 lakhs was utilized and adjusted towards purchase of a flat in the name of the second respondent and the remaining balance amount of ₹ 7.53 lakhs standing to the credit of the Company was transferred to his personal account. The cash withdrawals and cash transfers from the Company s account to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondent, which clearly shows that the second respondent was doing business for the second petitioner. Similarly, the second respondent was corresponding under the name of M/s. Bee Vee Traders in favour of customers like M/s. Vishnu Wears Private Limited as borne out by the communications produced before this Bench. The transactions carried on under the sole proprietary business would not appear in the books of account and cannot be reflected in the balance sheet of the company. In these circumstances, the CLB may appoint an independent auditor to inspect the books of account of the company to find out diversion of the business to the business concerns of the second respondent and misappropriation of funds and receivables of the company and the proprietary concern of the petitioners and surcharge him for such misappropriation. Shri Seshadri, learned Counsel, while concluding his submissions pointed out that the second respondent was directed by an order dated 16-7-2002 of this Bench to furnish a statement of purchases and sales made on account of the company, as on the last date of every month, which was totally disobeyed by the second respondent, entitling the petitioners for the pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and ill health submitted his letter of resignation dated 14-5-2002, resigning from the office of director, which came to be accepted on 21-5-2002. The dealings of M/s. Prakash Garments are only with M/s. Bee Vee Traders, being the sole proprietary concern of the second petitioner and any receivable due and payable by M/s. Prakash Garments can neither be accounted for in the books of account of the Company nor claimed by the Company. The second respondent never dealt with any money received from M/s. Prakash Garments, M/s. Dust Hakars etc. due to the proprietary concerns carried on by the petitioners and did not misappropriate the same towards purchase of a flat in his name. The amounts and figures shown as receivables in the company petition are not receivables of the Company, but they are all due to the sole proprietary concerns carried on by the petitioners. The second respondent denies any diversion of business and funds of the Company for his personal benefits. All money transactions inclusive of receipts and payments on account of the Company are towards business transactions of the Company and are properly accounted for in the books of account of the Company, duly audited a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I have considered the pleadings and arguments advanced by learned Counsel. Before considering the company petition on merits, it is necessary to observe that a number of attempts have been made for an amicable settlement of disputes between the parties. The parties have exchanged certain terms of compromise on more than one occasion. In fact, even at the conclusion of hearing, the second respondent expressed his willingness to pay ₹ 1,00,000 to the first petitioner and second petitioner a sum of ₹ 2,00,000 towards their shareholdings in the Company or in the alternative the second respondent was agreeable to transfer his entire shares to the petitioners for a total consideration of ₹ 3,00,000. The petitioners were reluctant about the proposal for paucity of doubtful creditworthiness of the Company on account of the purported misappropriation of funds of the Company and as such the compromise efforts failed. I shall, therefore, now consider the rival contentions of the parties. The facts as revealed from the materials placed before me show that the Company was incorporated on 27-3-1997 with the main objects to acquire the business of dealing in threads and garment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... less ratified by the members. This wrongful act is such that its effect would be a continuous act of oppression and therefore cannot suffer from laches, as contended by the second respondent. The plea of the second respondent that the shares were not issued as per the Articles of Association in view of the fact that the Company was incorporated for his sole benefit and further that the sole proprietary concern of the first petitioner was not taken over by the Company are not only contrary to the materials on record but also remain unsubstantiated. Moreover, the Managing Director is in a fiduciary position vis-a-vis the Company and must act bona fide in the exercise of his fiduciary responsibilities for the benefit of the Company in further allotment of shares. There exist a relationship of a trustee and cestui que trust as between the directors and Company. If this trust is found to be violated, the action of Managing Director is liable to be intervened by the Company Law Board. The responsibility of the Managing Director towards members becomes more onerous in a private company and therefore the courts have applied the quasi-partnership theory in such cases in the past and have gr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t with acknowledgement due (page 101 of company petition) specifically contended that they had received only a white sheet of paper with a word Contact without any signature date. I do not see any response to this communication from the second respondent. At the same time the second respondent by a letter dated 2-5-2002 (page 107 of company petition), while complaining of the receipt of an empty cover addressed to the Company by registered post, advised the second petitioner about the extraordinary general meeting proposed on 17-5-2002. Though the sequence of events show that the petitioners were informed about the extraordinary general meeting proposed on 17-5-2002, there is no material substantiating the fulfilment of the requirements of section 284(1) and (2) before removing the second petitioner from the post of director. The second respondent did not even chose to produce copy of the special notice containing the agenda and the special resolution in relation to the removal of the second petitioner from the post of director. Any omission to serve a special notice to the director sought to be removed constitutes denial of his statutory right of reply and the absence of a not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeting was purportedly held on 17-5-2002 and the minutes of the said meeting were said to be signed by the first petitioner, as Chairman of the meeting on 17-5-2002, the first petitioner could not cease to be a director of the Company as made by the second respondent with effect from 14-5-2002, vitiating the proceedings of the general body meeting on 17-5-2002. There is no explanation for this conflicting situation. The removal of any director in a private company, even if it is found to be lawful, may in certain circumstances constitute an act of oppression in reference to the aggrieved director. Similarly, even if the extraordinary general meeting is perfectly valid, yet may be oppressive, as held in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC). In the present case, admittedly the Company being wholly held by the petitioners and the second respondent, belonging to the same family is nothing but a family Company. The second petitioner has been a director since the very inception of the Company and therefore in my view the removal of second petitioner is oppressive, as held by this Board in a number of decisions, invol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the second respondent that huge cash withdrawals and funds transfer aggregating several lakhs of rupees were made by the second respondent from time to time, but failed to justify such cash withdrawals either in his counter statement or at the time of arguments. Furthermore, the Bank statement for the period between 2-5-2002 and 20-5-2002 reflects several entries aggregating ₹ 14,60,000 to the credit and a sum of ₹ 4,38,000 to the debit of current account of the Company, which are not found in the ledger maintained by the Company, copies of which are forming part of the records before this Bench. Similarly, the Bank statement reveals withdrawal of ₹ 1,10,000 on 20-5-2002, as against only a sum of ₹ 60,000 recorded on 21-5-2002 in the ledger of the Company. There is no explanation for any of these discrepancies, which are bound to be probed in the interest of the Company, to rule out any misappropriation by the second respondent for his personal benefit or business. The bald plea of the respondents that cash was withdrawn for the business purpose and to meet day-to-day affairs of the Company is neither convincing nor proved beyond doubt. The allegation of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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