TMI Blog2012 (4) TMI 718X X X X Extracts X X X X X X X X Extracts X X X X ..... and respondent No. 3 were the only directors of the respondent-company. The main objects for which the respondent-company was incorporated was to carry on the business of manufactures, producers, processors, growers, importers, traders, buyers, sellers or otherwise deals in all kind of agro-based products, food products, food processing, horticulture, sericulture, cultivators, of all kind of food grains, seeds fruits and vegetables, animal husbandry and garden produce of ever/description, frozen vegetables, fruits, dairy products, all varieties of food and to set up a cold store to preserve all type of vegetables, foods, fruits, agro and agro products and others, etc. The present activity of the company mainly involves manufacturing of Tomato paste and is also engaged in related products like chill puree, apple pulp, carrot puree, tomato ketchup/sauces, etc. The petitioner's case is that it was mutually agreed upon amongst the promoter directors that they will always have equal shareholding and also equal representation on the Board of directors of the company. But in order to gain absolute control over the company, respondent No. 2 and respondent No. 3 manipulated the records ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Even the independent auditor appointed by the CLB vide order dated 27th September, 2010 to inspect the records of the company has clearly pointed out in the independent audit report that the Board meetings approving the allotment of shares is neither supported by attendance register nor proceedings book was got signed by the present directors . Further in the independent audit report, it has been clearly mentioned under the head capital structure that 'neither the Board meeting calling extraordinary general meeting ( EGM ) to approve the enhancement nor the LGM was supported by attendance register and no each attendance was marked at the proceeding books and minute books of the particular Board meeting and EGM. As such quorum of the meeting cannot be verified'. Further, the respondents' case is that respondent No. 2 in connivance with respondent No. 3 has misused the funds of the respondent-company to make allotments to themselves and their relatives. The funds of the respondent-company have been circulated by respondent Nos. 2 and 3 from one account to another and ultimately used for making such fabricated allotments. My attention was drawn to the documents depi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtificates have not been issued in accordance with the Companies (Issue of Share Certificates) Rules, 1960. It was contended that no Board meeting or general meeting of the company has been held and all the minutes reflecting the holding of the meetings are fabricated. It has been observed in the audit report that the meetings have been shown as held at regular intervals, but no attendance record for the Board meeting and general meetings has been maintained, no notice calling the Board meeting and general meeting has been properly served. It was argued that this clearly shows that the records have been created later just to satisfy the company law requirements and in practice, no meeting was ever held and that is why there is no notice or attendance record of the meetings. When no meetings have been conducted till date, then the question as to how the company could take any corporate decision has not been answered. Further, it was argued that the respondent-company was formed to set up a food processing unit. The petitioner was appointed as director (quality assurance), respondent No. 2 was appointed as director (finance) and respondent No. 3 was appointed as director (techn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s respondent No. 2 has been paid remuneration of ₹ 4 lakh during the financial year 2007-08 and ₹ 6 lakh during the financial year 2008-09. Respondent No. 3 has also been paid remuneration of ₹ 2.50 lakh during the financial year 2007-08 and ₹ 6 lakh during the financial year 2008-09. It was pointed out that respondent No. 2 has been paid remuneration at the rate of ₹ 50,000 per month with effect from 1st August, 2007, whereas the company was incorporated on 10th September, 2007. The independent audit report mentions that Sh. Sanjeev Chaudhary and Sh. Jatinder Pal Singh have withdrawn salaries for the financial year 2007-08 and 2008-09 whereas no salary has ever been paid to the third director, i.e., Sh. Sunil Kumar, the petitioner. It has been mentioned the comments to the auditors' report that the salaries are being withdrawn from August 2007 whereas there is no Board resolution or general meeting resolution for the same which in itself is an evidence of contravention of the Act and financial mismanagement on the part of the respondents. It was argued that the minutes are merely fabricated records and have no legal sanctity at page No. 100 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a huge sum of ₹ 8.97 lakh towards the company and that too interest-free. My attention was drawn to the affidavit by Mr. Sunil Bhatia stating that none of his dues are pending towards the company and he was not engaged in any business activity with the company. There are certain creditors for building material whose balance (Rs. 11.3 lakh) are still outstanding till date and that is unlikely that small building material suppliers would allow such a long credit when in actual practice they supply the material on cash basis. The counsel for the petitioner pointed out that the respondent-company was to import brand new machinery of tomato paste from Fenco S P A, Italy at a cost of ₹ 3.20 crore. But instead of new machinery, the respondents have imported second hand machinery; however, they instructed the supplier not to mention the second hand machinery in the documents. The supplier of the main machinery, which clearly indicates that second hand machinery has been imported from Italy whereas the machinery has been financed as new machinery. Thus, huge funds has been embezzled by importing the second hand machinery at a much lower cost but showing it as new machinery a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. In May 2008, the company got CC limit of ₹ 50 lakh from the bank as working capital. With this capital and technical efforts of the petitioner, the company produced 650 tonnes of tomato paste of international quality standards at the plant of Punjab Agro Juices Ltd. and sold it to the big multinational companies at very good margins. The company made a turnover of ₹ 2.63 crore (2008-2009) just in one year of the incorporation of the company. On the basis of technical experience of the petitioner and the quality standards of the product produced, the company got advance of ₹ 72 Sacs from Fun Food (VRB Foods) and ₹ 12 lakh from Sanghavi Foods for the next year's supply. Also, the company got an interest-free loan of ₹ 27 lakh from the SFAC (Small Farmers Agribusiness Consortium) being an agro based project. The company made an annual turnover of ₹ 2.80 crore in 2009-10. Thus, the company always had abundant funds, which have been misappropriated by the respondent to gain unjust enrichment through illegal allotments, payment of remuneration to themselves. It was pointed out the audit report mentions that cash has been withdrawn from the bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d this land through his maternal aunt vide sale deed dated 24th December, 2009. Again, the same land has been transferred to the relatives of the respondent No. 3 on 14th July, 2010. The sale deed dated 14th July, 2010 clearly shows that Mr. Jatinder Pal Singh has signed the deed on behalf of his relatives as a purchaser of the land. The respondent Nos. 2 and 3 should have purchased the aforesaid land in the name of the respondent-company because the respondent-company cannot fulfil the requirement of Pollution Control Board without this piece of land. The respondents have, therefore, acted in breach of trust and have usurped the benefit of purpose of the land unto themselves at the cost of the respondent-company. Further, it was argued that the suppliers of the raw material, i.e., the poor and innocent farmers are suffering at the hands of the respondents, the cheques issued by the respondents to these formers are continuously bouncing and so they are not being paid the price of their produce. This is itself a big fraud when the respondents have already made the company's accounts empty through huge cash withdrawals, then why the cheques are being issued to the parties know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of Rajasthan. The amount was used for destalking of Chill and advance to the transporters, etc. Moreover, the cheques for withdrawal of this amount were signed by the respondent(s) also because the cheques were required to be signed by at least two directors of the company, no amount could be withdrawn by the petitioner without the joint signature of respondent No. 2 or respondent No. 3, the petitioner spent the amount for the business of the company and submitted the account statement for the same at that very time. Drawing my attention to the petitioner's contribution to the affairs of the company, it was pointed out that the project of the respondent-company is also of tomato processing , the petitioner put all his technical efforts and previous experience with heart and soul for the establishment of the said project. The petitioner got the project appraised from the bank for the required loan of ₹ 488 lakh on the basis of his technical qualification, experience in the same field, goodwill and market reputation. The petitioner also provided his land for security to the bank as legal mortgage. In the setting up of the project, the petitioner played vital role in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fruit jams and fruit drinks, so that bottling line of the respondent-company could run for the whole of the year. As a result, the respondent-company has tied up with some companies for the job work as well as company has come up with its own branding in the retail market. Apart from this, the petitioner has also given bank guarantee of ₹ 60 lakh from his relatives and friends. To support his contention, the counsel for the petitioner relied upon the cases of: (a) Kamal Kumar Datta v. Ruby General Hospital Ltd. [2006] 74 CLA 91 (SC) : JT [2006] 7 SC 333: Wherein, it was held that if the Board meeting has been convened without proper service of notice on the directors, such Board meeting cannot be said to be valid. (b) Hari Singh Rathore v. Drishti Media (P.) Ltd. [2006] 74 CLA 65 (CLB) : [2007] 3 Comp LJ 366: Wherein, it was held that meetings held without notice to all the directors are invalid. There was no evidence to show that notices were issued for the Board meeting to the three directors. (c) V. Ramesh Kumar v. Shanthini Jayakrishnan [2007] 80 CLA 195 (CLB) : [2007] 79 SCL 520: Wherein, it was held that requirement to issue notice under section 53(1) to ev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... LB): Wherein, it was held that the petitioners have rightfully invoked the provisions of these sections. The directors have breached their fiduciary duty and have acted against the interest of respondent-company, trying to dupe each other and trying to grab maximum benefits out of the transactions of respondent-company. Equity prohibits a trustee from making any profit by his management, directly or indirectly. It is objectionable to use such power simply or solely for the benefit of directors or merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company. Directors are required to act on behalf of the company in a fiduciary capacity and their acts and deeds have to be exercised for the benefit of the company. They have a duty to make full and honest disclosure to the shareholders regarding an important matter relating to the company. (j) Vivek Bansal v. R.M. Ispat (P.) Ltd. [2010] 94 CLA (CLB) : [2010] 154 Comp Cas 60 (CLB) [decided on 9th June, 2009]: Wherein, the petition was partly allowed and it was held that the onus of proof sending the notice of the meeting was on the sender and the meeting held without notice was invalid. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent-company were required to mandatorily increase its equity share capital from the initial amount of ₹ 9 lakh to 1.86 crore. At the time of incorporation it was agreed between the petitioner, R-2 and R-3 that all shall contribute equal and the shareholding amongst them shall be maintained equally. However, when respondent-company came out with further issue of shares, petitioner showed his inability/reluctance to invest such amount so as to maintain equal shareholding amongst the promoters. Considering the nature of business of respondent-company, the urgent necessity of funds and the undertaking given to Bank, R-2 and R-3 were left with no option but to raise additional funds by allotting shares to others. It was contended that each and every allotment which has taken place in the respondent-company till date is within the knowledge of petitioner and with his due consent and participation. Whenever further shares were to be allotted, even though petitioner subscribed to lesser number of shares or did not subscribe to any share, all allotments, whether to the existing shareholders or new shareholders, were with his due consent. Funds were raised in the respondent-company o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of initiating appropriate legal recourse against petitioner for causing such irreparable damage to respondent-company. By bringing in the present petition under false and frivolous grounds is trying to hamper the normal functioning of the respondent-company, which is still at an infancy stages, the petitioner has leveled baseless, bare and frivolous allegations of oppression and mismanagement just to malign the image of the respondent-company to tarnish the goodwill of the respondent-company with the mala fide intent of pressurising the respondents to meet his mala fide intentions. It was argued by the counsel for the respondents that the present petition is not maintainable. From the independent audit report dated 26th November, 2010 of Lochan Kundra Associates, chartered accountants appointed by the CLB, it is absolutely clear that the affairs of the respondent-company are carried out in a fair manner and there is nothing which indicates any embezzlement of funds though overbilling, financial mismanagement or which supports other false claims and allegations of the petitioner. The company is in due compliance with the provisions and procedural requirements of the Act and ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases 49, it was observed that oppression implies a lack of probity and fair dealing in the affairs of the company to the prejudice of some portion of its members. However, inefficient management will not amount to oppression though it may amount to mismanagement under section 398. Nor will oppression not relating to the company's affairs but directed towards a third person come under this section [Kanika Mukherji v. Rameshwar Dayal Dubey [1966] 1 Comp LJ 65 (Cal.) refers]. Oppression may take different forms and need not necessarily be for obtaining pecuniary benefit. It may be due to a desire to obtain power and control, or be merely vindictive - H.R. Harmer Ltd., In re. [1959] 29 Comp Cas 305 (CA). Where no private agreement or understanding among members of a private company as to appointment of directors is provable, the fact that the majority shareholders appointed all directors does not amount to oppression - V.M. Rao v. Rajeshwari Ramakrishnan [1987] 61 Comp Cas 20 (Mad.). It was argued that unwise inefficient or careless conduct of a director in the performance of his duties cannot give rise to a claim for relief under section 397. The person complaining of oppression ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch side is equally strong, and one is unable to oppress the other, there may be a deadlock but not oppression. It is not case for winding up. Burden lies on the petitioner to prove his allegations. Where the allegations were not substantiated with cogent evidence, nor a case of winding up was made out, which is a prerequisite for relief, the petition was dismissed. It was argued that good faith and conduct of petitioner are other important considerations. The right to petition is a product of equity and, therefore, there must not be such conduct as would disqualify the plaintiff from proceeding against the company. For instance, if he participates in the wrong complained of by him, he would be disqualified from applying for relief. It is a settled proposition of law that the conduct of the parties is a very relevant factor to be considered in the equitable proceedings under section 397/398. It was held that petitioner seeking equitable relief must come with clean hand and good conduct, failing which the petition would constitute a gross abuse of the process of court, and the petitioners is not entitled for any relief under section 397/398. But as the respondents are willing to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nagement that it would be wrong for the court to question the correctness of the management's decision if bona fide arrived at. The counsel for the respondents drew my attention to the case of Prem Seth v. National Corporation Ltd. [1996] 20 CLA 341 (Del.) : AIR 1994 Del. 2285 wherein the petitioners had contended that respondents issued fresh right shares in violation of the Act without any genuine need for raising any capital for which necessity could arise for issuing of the fresh right shares, it was argued that these issues of shares were to dilute the holding of the petitioner's shares in the company. It was held that the petitioners have relied upon the Nanalaia Zaver v. Life Insurance Co. Ltd. [1950] 20 Comp Cas 179 (SC) case in which it was held that it is a well settled law that in exercising power whether general or special, the directors must always bear in mind that they hold a fiduciary position and must exercise their powers for the benefits of the company and for that alone and that court can intervene to prevent the abuse of a power whenever such abuse is proved, but it is equally settled that directors have a discretion and are bona fide acting in the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he court must confine itself to the case as made out in the petition and to the allegation in the petition itself and supporting affidavits, if any and not look at other evidence with regard to events that might have happened subsequent to the petition. Full particulars must be given by petitioners in an application under sections 397 and 308 of the Act on the oppression and mismanagement. Vague and uncertain allegation of mismanagement and oppression did not entitle petitioners to ask court to embark upon investigation. Relying upon the case of P.S. Offshore Land Service (P.) Ltd. v. Bombay Offshore Supplies Services Ltd. [1992] 75 Comp Cas 583 (Bom.) it was argued that in a petition under sections 397 and 398 all materials must be set out in the petition itself and allegation of fraud, coercion, mala fide in any must be supported by particulars. Further, relying on the case of M.M. Dua v. Indian Dairy Allied Services (P.) Ltd. [1996] 86 Comp Cas 657 (CLB) it was argued that the petitioner must set out full particulars of allegations of oppression or mismanagement to claim relief under section 397/398. It was submitted that mere non-compliance with the provisions of the sta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nswer to the findings that (a) there is overbilling in the structural value of the building by ₹ 26 lakh, (b) investment of interest-free sum of ₹ 8.97 lakh by an employee, who has denied the investment, stands unproved, (c) the tomato paste machinery purchased from Italy is a second hand machinery but cost of a new machinery of ₹ 3.20 crore has been shown in the account books, (d) locally assembled boilers were purchased but cost for 6 TPH capacity boilers was shown in the books, (e) billing for SS storage tanks instead of being ₹ 8.38 is shown as ₹ 16.76 lakh, (f) there is no answer to the purchase of a second hand machinery from SSRB Food Processing (P.) Ltd., (g) there is no clarification given by the respondents as to why huge withdrawals of amounts from banks were made in spite of huge cash is hand being available in the books. (iii) In this case I notice that the respondents have breached their fiduciary duties as directors. On the role of directors, the law is well settled. In some respects, directors resemble trustees. Equity prohibits a trustee from making any profit by his management, directly or indirectly. The power to issue shares in t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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