TMI Blog2006 (10) TMI 470X X X X Extracts X X X X X X X X Extracts X X X X ..... fs claimed therein. ( 2. ) Sri Udaya Holla, learned senior Counsel while initiating his arguments submitted: * The first petitioner and his family (Hanji Family) and the third respondent and his family (Humbarwadi family) had constituted in the year 1973, prior to incorporation of the Company, a partnership firm under the name and style of M/s Ashok Iron and Steels for carrying on the foundry and engineering business with profit ratio of 25:75 per cent between the two groups. During the year 1978, the first petitioner and the third respondent commenced three more partnership business under the name and style of (i) Jaihind Engineering; (ii) Progressive Engineering and (iii) Standard Engineering with profit ratio of 25:75 percent between them. Later in September 1982, M/s Ashok Iron and Steels, the partnership firm was converted into a private limited company namely, M/s Ashok Iron Works Private Limited by allotting shares in the proportion of 25 per cent to Hanji family and 75 per cent to Humbarwadi family. The conversion was effected by dissolving the partnership firm and allotting the business of the firm to the Company, which was one of the partners in the firm. Consequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te register. * All possible efforts to bring an amicable solution by persuading the third respondent to mutually resolve the issues have not yielded any desired results. The parties, further, attempted to resolve the differences through the arbitration process by entering into an arbitration agreement and accordingly the Legal Advisor and Chartered Accountant of the Company were appointed as arbitrators. While the disputes were between the two group of shareholders. the arbitration agreement was wrongly entered into between the first petitioner and the Company. However, the arbitrators proceeded with the arbitration process notwithstanding the objections raised by the first petitioner and the continuation given by the third respondent regarding the validity of the arbitration agreement. The award has been passed without the arbitration agreement and therefore, the award must be ignored. It is only an arbitration agreement and not mere acquiescence confers jurisdiction on an arbitrator, as held in U.P. Rajkiya Nirman Nigam Limited v. Indure Private Limited and Ors. . It is further held in Khardah Company Limited v. Raymon Co. (India) Private Limited AIR 1962 SC 1810 that an arb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he entire arbitral process has been subverted by the third respondent in collusion with the arbitrators in order to remove Hanji family from the governance of the Company and cannot operate against the petitioners, in support of which reliance has been placed on (a) Ram Chandra Singh v. Savitri Devi and Ors. to show that fraud vitiates every solemn act. Fraud and justice never dwell together. Misrepresentation itself amounts to fraud. A collusion or conspiracy with a view to deprive the rights of others in relation to a property, would render the transaction void ab initio; and (b) Beli Ram Brothers and Ors. v. Chaudri Mohammad Afzal and Ors. AIR (35) 1948 Privy Council 168 to show that any decree obtained by fraud and collusion does not operate as res judicata. No one should be permitted to abuse the process of court, failing which a judicial proceeding which is otherwise permissible may become an engine of fraud as held in Bank of India v. Vijay Transport and Ors. . It is held in Gram Panchayat of Village Naulakha v. Ujagar Singh and Ors. that any judgment, order or decree obtained by fraud or collusion can be avoided not only by proceedings for avoidance but also can be raised ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission in proportion to the shareholding of Hanji family and Humbarwadi family, but the third respondent again on the strength of his majority in the board of directors and in the shareholding of the Company rejected the proposal made by the first petitioner on the ground that the managerial remuneration is based on professional qualification and competence and it has nothing to do with the shareholding pattern. Nevertheless, at the meeting of board of directors held on 14.03.2005. the remuneration of the third respondent was increased from ₹ 3.6 lakhs to ₹ 60 lakhs per annum apart from commission of 5 per cent and other perquisites aggregating ₹ 1.5 crores per annum. Similarly, the remuneration of the fourth respondent who became a director only in December 2004 was fixed at ₹ 24 lakhs per annum apart from commission of 4 per cent and other perquisites aggregating ₹ 1 crore per annum. The remuneration was made effective with effect from 21.12.2004. The third respondent and his son withdrew the commission amount as early as on 01.06.2005 much before the determination of profits for the year ended 31.03.2005 and even before the annual accounts were a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided to the minority shareholders in the articles of association. The proposed amendments are with a malafide intention to usurp control of the Company and do away with the safeguards enjoyed by the minority shareholders. * While the Act provides for an outsider to be a proxy, Article 2(xii) proposes that the proxy must be a member of the Company. This is violative of Section 176. * The Company has been authorised by virtue of Article 2A to carry out any transaction under the Act, which enables the board of directors to exercise wide and unfettered powers which are not intended in the articles. * Article 6 is substituted, empowering the board of directors to dispose off the unissued shares in the Company to any person, whether he is a member or not, in such proportion and in such manner, the board of directors may think fit. * The board of directors is being empowered, by amending Article 13 to decline the registration of transfer of shares thereby restraining the minority shareholders from selling the shares to any other person even in the absence of any member declining to purchase the shares at a fair market value. No such absolute power should be given to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the third respondent on the strength of his majority in the board of directors got the resolutions passed, without giving any justification for rejecting the objections raised by the petitioners, thereby the petitioners being minority shareholders are being oppressed by the respondents. It has been held in Mathrubhumi Printing and Publishing Company Limited v. Vardhaman Publishers Limited and Ors. (1992) Vol. 73 CC 80 that no majority of shareholders can, by altering the articles retrospectively, afreet, to the prejudice of the non consenting owners of shares, the right already existing under a contract, nor take away the right already accrued. * The core business of the Company comes from two units comprising of two foundries and one machine shop. The third respondent is embarking upon to put up one more foundry unit with the initial expansion plan for 18,000 MTs at an estimated cost of ₹ 19 crores and additional machine shop. However, in September 2004 the investment for the first phase of the expansion programme was unilaterally increased to ₹ 28.96 crores, while the annual capacity remained without any change at 18,000 MTs. The third respondent modified th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned is deprived of rights and privileges for all time to come in future, then the petition under Section 397 can be filed even in respect of a single act. If the Court is satisfied as held in J.P. Srivastava Sons (P) Limited and Ors. v. Gwalior Sugar Company Limited and Ors. that the petitioners represent a body of shareholders holding the requisite percentage, it can assume that the involvement of the Company in litigation is not likely done and that it should pass orders to bring to an end the matters complained of and not reject it on a technical requirement. Substance must take precedence over form. The arbitrators by an award dated 24.01.2005 directed Hanji Family to sell their shares to the board of directors of the Company. If there is any difference regarding the price between the parties, the statutory' auditor of the Company shall fix the reasonable market value of the shares which is binding upon the parties. There has been animosity between Hanji family and the statutory auditor and therefore, the valuation of shares should not be left to the statutory auditor. The powers of CLB under Section 402 are statutory powers in pursuance of which directions are give ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffer ₹ 15,000/ - per share for the shares held by the respondents. Shri K.G. Raghavan, learned Counsel vehemently opposed the company petition on the following grounds: * The Company was a partner in M/s Ashok Iron and Steels, Belgaum for a period of over a year. By a deed of dissolution dated 30.09.1982, the partnership was dissolved and the business of the dissolved firm was allotted to the Company. The partnership firm was not converted into a private limited company. It was never understood that 25 per cent would be held by Hanji family and 75 per cent by Humbarwadi family for all time to come. The memorandum and articles of association of the Company do not indicate any such restriction in respect of issue of shares to the shareholders. The board of directors of the Company is comprised of directors who are independent and not related to either family and therefore, the Company is not run like a partnership concern. Any restrictive or pre -emption right of transfer of shares, being a common feature of the most of private limited companies is permissible in law. The partnership became the Company, with which relationship among the partners ceased to exist. While the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re has been since the year 1986, business dealings between the Company and M/s Fluid Dynamics Private Limited, as borne out by the Register of Contracts maintained by the Company. FDPL has the facilities or machineries to carry out fettling or repairs to machines. FDPL has been in receipt of work orders, purchase orders and such contracting work from the Company, which are supported by invoices, work orders, purchase orders etc. and are within the knowledge of the petitioners. All the vouchers for the period 2000 -2001 have been produced for carrying out inspection by the petitioners. The accounts for the years 2000 -01 and 2001 -02 were duly audited and adopted at the relevant point of time, but the petitioners never made any complaint on the purported siphoning of the Company's fluids. The first petitioner never complained of these issues at any of the board meetings, but grievances are being raised for the first time in the present proceedings. The first petitioner was the Managing Director during the period between 1991 -92 and 1998 -99, during which time the first petitioner entrusted substantial work to FDPL. The Company has given job work and purchase orders to certain p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent to Humbarwadi group and 25 per cent to Hanji group was not considered by the Board on the ground that the issue of managerial remuneration can not be related to the shareholding pattern of the working directors. The first petitioner accepted the collective decision of the board of directors taken at the meeting held on 20.12.2004 on the issue of managerial remuneration and declaration of dividend, by approving the minutes of the concerned board meeting at the next board meeting without any exception. The first petitioner by his communication dated 30.12.2004 pointed out certain discrepancies in the minutes dated 20.12.2004, but never raised any objection on payment managerial remuneration and non -declaration of dividend, as decided at the board meeting held on 20.12.2004. There were four independent directors at the board meeting held on 20.12.2004, when these issues were deliberated. The Company since its incorporation in the year 1981 never declared dividend though, profits have been made consistently over the years barring a few years. Moreover, directors in their wisdom decided that there should not be any declaration of dividend and therefore, the third respondent c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lary paid by the company to its directors would not constitute an act of oppression. The Kerala High Court held in Palghat Exports Private Limited and P. Ramkumar v. T.V. Chandran and Ors. Judgment date 26.05.1993 of Kerala High Court that under Sections 397 and 398 of the Act (a) no personal grievance of a member himself is contemplated; (b) if the petition is not bonafide, the court is bound to reject it; (c) if the object of a petition under Section 397 is to recover the money invested from the controlling shareholders, it is an abuse of the process of the court and on that ground the petition would be dismissed; and (d) if a petition is lodged with the object of exerting pressure in order to achieve a collateral purpose, the petition must be dismissed. * The Company has three plants, of which plants I II are running to capacity and protitable. The financial viability has been conducted by State Bank of India. Similarly, one Wolfgang A Pech, a German Consultant, conducted technical viability study of plant III of the project, which is in possession of the Company and the viability reports are within the knowledge of the first petitioner. The issue of expansion plans came to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... III, since March, 2005, which would reach its maximum capacity in due course of time. The Company did not procure old and out dated machines for the machine shop. Every machine has been acquired in a transparent manner and with full knowledge of all directors. Thus, the issue of expansion plant has been dealt with in a democratic manner with the concurrence of the first petitioner. * The changes to the articles of association have been carried out in a lawful manner with majority of 76.20 per cent at the extra -ordinary general meeting held on 26.09.2005. The decision was to amend 27 items of articles but the petitioners are aggrieved on account of only 12 items. It has been held in (a) Claude -Lila Parulekar v. Sakat Papers P. Ltd. and Ors. that Section 36 of the Companies Act, 1956 makes the memorandum and articles of the company, when registered, binding not only on the company but also the members inter se to the same extent as if they had been signed by the company and by each member and covenanted to by the company and each shareholder to observe all the provisions of the memorandum and of the articles. The articles of association constitute a contract not merely between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the changes in the Company Law. * Article 29 on borrowing powers is sought to be deleted, since the provisions of Section 293 are not applicable to the Company. * Article 33 providing that the executive director is not liable to retire applies to the post and not to the individuals. The fourth respondent is presently the Managing Director and any one from the petitioners' group may in future become the Managing Director. Hence, proposed Article 33 can not said to be unfair. * Article 40 dealing with the appointment of Managing Director/Technical Director is applicable to the office of director, of which the petitioners can have no grievance. * The amendments to articles 38 43 concerning restriction on payment of managerial remuneration have become necessary, as they are not applicable to private limited companies. * Article 44B and 44C on the issue of sweat equity shares and employees stock option have been introduced to keep in pace the present day context and no grievances can be attributed to the petitioners. * The respondents are not willing to sell their shares to the petitioners. However, the respondents are ready to purchase the shares of the petit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e passed by the CLB may be in conflict with the award on the price payable for the shares of the petitioners. The award stipulates that the shares of the petitioners shall be offered at the price which may be determined by the statutory auditor of the Company. The CLB can not go into the same issues and reliefs involved in the arbitral award. The petitioners have not made any prayer in the petition for sale of the shares by the petitioners. * The respondents did not withdraw an amount of ₹ 1.07. crores to satisfy the arbitral award in respect of the three partnership firms. The Company made the payments in. respect of on -going transactions with the partnership firms. The ledger extract of the Company for the period from 01.01.2005 to 31.01.2005 would disclose an amount of ₹ 1.31 crores due by the Company to the partnership firms. * The Supreme Court categorically held in (a) Hanuman Prasad Bagri and Ors. v. Bagress Cereals Private Limited and Ors. that Section 3.97(2) of the act provides that an order could be made on an application made under Sub -section (1) if the court is of the opinion - (i) that the company's affairs are being conducted in a manner prej ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Steels for carrying on the foundry and engineering business with profit ratio of 25:75 per cent between the two groups. Similarly, the first petitioner and the third respondent had commenced in the year 1978, three more partnership business with profit ratio of 25:75 per cent between them. The Company incorporated in the year 1981 was a partner in M/s Ashok Iron and Steels. However, by a deed of dissolution dated 30.09.1982, the partnership was dissolved and the business of the dissolved firm was taken over by the Company. The third respondent and his family members hold 71.28 per cent, while the first petitioner and his family members hold 23.76 per cent of the total paid up share capital of the Company. The balance of 4.96 per cent of the shares of the Company is held by M/s Nutan Investments and Trading Private Limited, which is controlled by Hanji family and Humbarwadi family, in the ratio of 25:75 per cent of its paid up capital. Thus. Hanji family and Humbarwadi family have been holding 25:75 per cent of stake in the business ventures undertaken by them since the year 1973, despite the fact that there has been no such explicit understanding to the effect that 25 per cent wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4, he was demanding for himself one -third of the managing directors' salary in view of his holding of 25 per cent shares in the Company. The first petitioner while suggesting certain changes to be carried out in the minutes of the meeting dated 20.12.2004, never objected to the decisions of the board of directors on payment of managerial remuneration and non -declaration of dividend to the shareholders. The sequence of events would show that there is no illegality in rejecting the proposal of the first petitioner regarding payment of managerial remuneration and declaration of dividend. At the same time, in a petition under Section 397 it is not the legality or illegality of an action which has to be examined, but it is the probity and fairness towards the petitioners in the matter of the proprietary rights as shareholders, with which the said decisions are taken must be considered. Though, the increase in remuneration and declaration of dividend were declined by the directors at the meeting held on 20.12.2004, yet remuneration of the respondents 3 4, being father and son, together with commission came to be enhanced to ₹ 1.5 crores and one crore per annum respectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le, in the light of meagre remuneration drawn by the first petitioner at the relevant point of time. This single act of oppression would not ordinarily give rise to any cause of action for filing a petition under Section 397, but at the same time when the petitioners are deprived of their rights and privileges, as recognized by the Courts, to enjoy the profits of the Company in the, shape of dividends, since its inception in the year 1981 such aggrieved shareholders can apply before CLB even in respect of even a single act, as held in Maharashtra Power Development Corporation Limited v. Dabhol Power Company and Ors. (supra) irrespective of the fact whether the quasi partnership principles, as enunciated in Hind Overseas Private Limited v. Raghunath Prasad Jhunjhunwalla and Anr. (supra) and Kilpest Private Limited and Ors. v. Shekhar Mehra (supra), can be extended to the Company or not. In view of this, the question whether the CLB is empowered to grant any relief even when no case of oppression is made out by the aggrieved shareholders does not arise for my consideration. The grievance of the petitioners that the respondents 3 4 were paid commission, prior to approval of annual a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The first petitioner never chose to place the grievance relating to the alleged siphoning of funds on account of M/s Fluid Dynamics Private Ltd, at any of the board meetings. Further more, the general allegations mat the third respondent siphoned of ₹ 78 lakhs during the year 2000 and 2002 remain unsubstantiated, The petitioners are barred by laches or acquiescence from complaining of alleged illegal siphoning of the funds by the third respondent from the Company to M/s Fluid Dynamics Private Ltd more so when the accounts for the years 2000 -01 and 2001 -02 have been duly audited and adopted, without any objection raised by the petitioners. Similarly, the allegations regarding misappropriation of ₹ 1.07 crores are neither supported by particulars nor foundation laid for proving such misappropriation of funds. It is well settled that if the allegations are not established by evidence. no relief can be granted remedying any of such grievances. The Company has three plants, of which, it is reported that plant -I and plant -II secured ISO 9000 and QS 9000 certification respectively. The grievance of the petitioners is that the third respondent is embarking upon to add on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout making any grievances at any of the subsequent board meetings, has belatedly challenged the increase in capacity of plant -III from 18,000 MTs to 36.000 MTs in the present proceedings. The conduct of the respondents in increasing the capacity of plant -Ill cannot be said to be burdensome, harsh and wrongful and does not satisfy the yardstick prescribed by the Supreme Court laid down in Shanti Prasad Jain v. Kalinga Tubes Limited (supra). The Company represented by its Chairman namely, the third respondent entered into an arbitration agreement in September 2004 on behalf of the board of directors with the first petitioner for himself and other family members, to determine the value of 25 per cent shares of the first petitioner and his family members in the Company in order to take away their 25 per cent share from the Company and quit. Accordingly, Shri T.N. Sanikop, Advocate and Shri M.S. Paranjape, Chartered Accountant, were appointed as arbitrators. The arbitrators proceeded with the arbitration proceedings and gave their award on 24.01.2005, despite the objections raised by the first petitioner regarding the validity of the agreement, reasons of which are not germane to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Ors. (supra), to give directions contrary to the articles or provisions of the Act. The Company and the first petitioner are parties to the arbitration agreement and therefore, there can be no impediment in giving any direction for the purchase of the shares of the petitioners by other members namely, Humbarwadi family, not withstanding the fact that the award dated 24.01.2005, is under challenge before the Court of District Judge, Belgaum. The relationship between the first petitioner and the statutory auditor, one of the arbitrators, can not be expected to be cordial, on account of the criminal complaint lodged by the first petitioner in connection with the award dated 24.01.2005, by which the statutory auditor was to fix the reasonable market value of the shares of the Company. In view of this, any direction for purchase of the shares of Hanji family by Humbarwadi family at a fair selling value which may be fixed by the statutory auditor, in terms of Article 10 will not however be palatable. The valuation on the other hand, shall necessarily be carried out by any independent valuer, which will meet the ends of justice, thereby, the petitioners can exit the Company at a fair ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rom the company petition, is to seek appropriate remedial, measures with a view to bringing to an end the matters complained of by them. This is manifest from as many as fifteen reliefs as claimed by the petitioners. It may be observed that the petitioners have not choosen to claim the monies invested by them from the controlling shareholders. It is only when the differences could not be reconciled between the petitioners and the respondents in carrying on together the affairs of the Company on account of, inter alia, the proposed expansion plans mooted out by the respondents Sri Udaya Holla, learned Counsel, came out with a workable proposal for the exit of the petitioners from the Company and not at any earlier point of time. At this juncture, it is relevant to point out that the first petitioner while questioning the validity of the arbitration agreement, merits of which are not being considered by me. in his communication dated 26.11.2004 advised the arbitrators that he had repeatedly emphasized that an settlement of his share in the business he wanted to have one or more of the divisions of the business and not merely money towards his share of the business. In the circumstanc ..... X X X X Extracts X X X X X X X X Extracts X X X X
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