TMI Blog2014 (4) TMI 1191X X X X Extracts X X X X X X X X Extracts X X X X ..... d the same is hereby set aside. The petitioner is reinstated to the post of director with effect from the said date with all consequential benefits. Let statutory form be filed with the RoC within a period of 30 days. (ii) The appointment of the respondent Nos. 3, 4 and 5 as directors on the Board of the company is declared illegal, non est and invalid and they are removed as the directors of the company with immediate effect. Let statutory form be filed as required under law. (iii) It is further declared that the meetings where at the allotment of further shares were made to the respondent Nos. 3, 4 and 5 are declared non est, ultra vires and illegal and the resolutions passed thereat insofar as they relate to allotment of additional shares to the respondent Nos. 3 to 5 and further shares to the respondent No. 2 is set aside and status quo ante be maintained as it existed prior to allotment of such shares. The respondents shall get back their respective application money. However, it is clarified that the company is not prevented from making allotment of additional shares for raising funds in accordance with the provisions contained in the Act for the time being in force and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated at the factory premises of the respondent No. 2, i.e., c/o. Kothari Udhyog, BhokerdaN Road, Near Dhawleshwar Temple, Jalna, State of Maharashtra. 1.2 The respondent No. 2 Vinay Kumar Rijkhab Kothari is also a founder director of the company and originally subscriber of the memorandum holding 5,000 shares of ₹ 10 each and presently working as chairman of the company. Respondent No. 3 is the son of the respondent No. 2 of the director. Respondent No. 4 is the wife of the respondent No. 2. Respondent No. 5 is brother-in-law of the respondent No. 2. All the said respondents are presently directors on the Board of directors of the respondent No. 1-company. 1.3 It appears that some dispute arose between the parties in the middle of 2011. According to the petitioner, he came to know certain oppressive actions taken by the respondent No. 2 in collusion with respondent Nos. 3 to 5 at his back and without notice to Turn which according to the petitioner fall within the definition of section 397/398 of the Act. 1.4 The petitioner in short has complained various acts of oppression and mismanagement against the respondent Nos. 2 to 5 purportedly committed by them in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... joinder has been filed. Thereafter, a supplementary affidavit was filed by the petitioner to which the respondents have been filed an affidavit in reply. I have heard the learned PCS appearing for the respective parties and perused the record. I have also gone through the written submissions filed by the respective parties. The first question that arises for my consideration is as to whether the petitioner himself voluntarily resigned from the office of director of the respondent No. 1-company Or the respondents fabricated his resignation and filed the same in the office of the Registrar of Companies ('RoC'), thereby showing his cessation as a director of the respondent No. 1-company. It is the case of the petitioner that after incorporation of the company in the year 2006, the company submitted a tender for purchase of Jijamata Sahakari Shakkar Karkhana situated at Dusarbid, Taluka, Sindkhedraja, District Buldhana, by auction with the Government of Maharashtra. It is further the case of the petitioner that the bid of the company was accepted. It is next submitted that the total cost of the tender was ₹ 15.15 crore out of which ₹ 2.00 crore was paid ini ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efinition of section 397 of the Act. Next point argued by the learned PCS for the petitioner is that assuming for the sake of arguments that the petitioner was served with the statutory notice under section 284 read with section 190 of the Act and the procedure for his removal as a director of the company was adopted in accordance with the provisions of the Act, yet his removal as a director is bad in law for the following reasons and, thus, liable to be set aside and he deserves to be re-instated as a director: (i) Because, the company was in the guise of quasi-partnership. The petitioner and the respondent No. 2 each were originally holding equal number of shares and they are original subscriber to the memorandum and articles of association of the company since its inception and were also founder directors. The rights, duties and the obligations between two of them were well defined. It is, therefore, the respondents cannot throw the petitioner in an arbitrary manner without any cogent reason. (ii) Because, no notice was served upon the petitioner under section 190 of the Act. Further, no opportunity was granted to the petitioner of being heard by submitting his represen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. I have considered the submissions and examined the documents carefully. I do not deem it necessary to adjudicate the issue as to the removal of the petitioner as a director of the company on the Basis of his alleged resignation letter which according to the petitioner was fabricated by the respondent No. 2. The reason is that admittedly the said removal of the petitioner as a director was revoked by the company and he was reinducted on its Board. I am, therefore, of the view as that insofar as this complaint is concerned, since, it was already brought to an end by inclusion of the petitioner as a director on the Board of the company, and, therefore, this issue is now irrelevant for the purpose of this petition. The next controversial issue which needs consideration by this Board is the removal of the petitioner under section 284 of the Act. In this regard, I am required to examine the facts of the case in hand as to whether the company was in the guise of quasi-partnership. To examine this issue, I would like to first refer to few decisions which postulate the principles of quasi-partnership. The relevant extract of the decisions are as under: (i) Jagjit Singh Chawla v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t was established. The Company Law Board ('CLB') held that ouster of one of them as director was an act of oppression warranting winding up of the company on just and equitable grounds. As a matter of fact there is nothing on record to show that the company invited any outsider to become a shareholder. The composition of Board of directors shows that one member from each groups has been taken on the Board as director and, thus, ensuring joint petitioner and the respondents would prima facie establish that the company has been incorporated with mutual trust and confidence among shareholders with a view to run it in the form of a quasi-partnership and, therefore, the petitioner is at liberty to challenge his ouster from the management in this petition under section 397. In the case of Ebrahimi v. Westbourn Galleries Ltd. [1972] 2 WLR it has been held as under: ....While no doubt the petitioner was lawfully removed, in the sense that he ceased in law to be a director, it does not follow that in removing him the respondents did not do him a wrong. In my judgment, they did do him a wrong, in the sense that it was an abuse of a power and breach of a good faith which par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wever, the learned PCS appearing for the respondents admitted that except the said notice, the other notices for holding the Board meetings and the EGM were duly despatched to the petitioner's address available on the record of the company through postal certificate as provided in section 53(b) of the Act for service of a notice upon a director/shareholder of the company. Referring in the decision in the case of Westfort H-Tech Hospital Ltd. v. V.S. Krishnan [2007] 78 CLA 255 (Ker.) it is submitted that where a service of notice is required by law through postal certificate in that case the fact of posting has to be proved by the sender. Further, the court can rely upon the same if it is proved that the document was duly posted under postal certificate ('UPC') at the correct address of the notice. Once it is so proved, onus rests on the addressee to show that the document referred to in the certificate of posting was not received by him. In this regard, the learned PCS has also relied upon a decision rendered by the hon'ble Apex Court in the case of M.S. Madhusoodanan v. Kerala Kaumudi (P.) Zid. [2003] 55 CLA 372 (SC). In reply, the learned PCS for the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CS appearing for the petitioner on his behalf denied the service of notice in respect of the meeting purportedly held on 7th July, 2011 allegedly sent by the speed post and submitted that although the envelope sent by the speed post by the respondents on 9th June, 2011 along with an acknowledgement was received by the petitioner, but it did not contain the special notice for holding the EGM, as contended by the respondents. According to the learned PCS for the petitioner, in the captioned envelope a reply to the complaint made by the petitioner alleging certain facts was received and not the special notice. The learned PCS, therefore, submits that the respondents have created a false evidence to prove that a special notice under section 190 read with section 284 was served upon the petitioner. On the other side, the learned PCS for the respondents submits that the notices as required by law for removal of a director of a company along with the explanatory statement under section 173 was served upon the petitioner through the speed post and despite, the service of notice the petitioner did not prefer to file any representation in respect of the charges levelled against him by a m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 39;s account to his own account through net banking. I have examined the answers/explanation submitted by the petitioner in regard to the above charges. According to him, the allegations as regard to purchase of diesel and sugarcane above the market price, it is pertinent to note here that admittedly, the cheques were issued for such payments under joint signatures including that of the respondent No. 2 himself. Furthermore, as regard to the allegations for sale of molasses, it may be noted from the material available on record that the respondent No. 2 himself had taken advances for the sale of the same at the rate of ₹ 3,500 per ton whereas the petitioner has sold the same at the rate of ₹ 3,700 per ton. In addition to above, the respondents have failed to substantiate the other charges mentioned above by any cogent and reliable evidence. I am, therefore, satisfied with the explanation offered by the petitioner and it seems that the grounds for his removal are flimsy and cannot be relied upon. In my view, the said grounds have been concocted by the respondents in order to give colour to their case. I do not find any material on record which prove that the petitione ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 26th July, 2011, with back date from 15th June, 2007. In addition, 100 shares of the respondent No. 2 were shown transferred to the respondent No. 5 to make more number of shareholders. It is the case of the petitioner that he was never aware of the above changes and did not receive any notice from the respondent Nos. 1 and 2 for holding a Board meeting whereat the appointment of the respondent No. 5 was considered and decided. According to him, the signature of the petitioner on the alleged attendance sheet filed to show his presence in the impugned meeting is forged and fabricated. To prove the fact, that the appointment of respondent No. 5 is ante-dated, it was pointed out by the learned PCS for the petitioner that if the respondent No. 5 was a director on 6th March, 2006, then why his name did not appear in the notice of Board meeting dated 31st March, 2011. Besides, in the statement of the State Bank of India ('SBI') dated 16th August, 2011, issued on the same date, and on a declaration made by the company to the HDFC Bank for opening of an account, the names of respondent Nos. 3 to 5 did not exist. This clearly shows that the appointment of the respondent No. 5 is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HDFC Bank, the said resolution can be certified by any director and the signature of all the directors for certifying the resolution by all the directors was not required. Lastly, it is submitted that insofar as transfer of 100 shares belonging to respondent Nos. 2 to 5 with effect from 8th June, 2006, the said transfer was duly approved by the Board at the meeting held on 8th July, 2006, a copy of notice for the said meeting for proof of service is also available on record. It is therefore, contended that he, respondent No. 5, was duly appointed with the consent of the petitioner in a valid Board meeting and all the contentions raised to the contrary are frivolous and baseless. I have considered the rival submissions. I am not inclined to agree with the version put-forth by the respondents. I find force in the submission of the petitioner that had the respondent No. 5 been appointed as an additional director with effect from 6th March, 2006, there was no reason to file Farm 32 with the MCA Portal after a long period of five years four months. Secondly, in the notice dated 21st March, 2011, for the Board meeting issued by the company on 21st March, 2011, name of the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... described hereinabove, the service of notice through UPC, if denied cannot be presumed as a sufficient service unless there is enough corroborative evidence available on record. Admittedly, the respondent-company has not produced any despatch register or books of account showing the expenses incurred by the sender towards the posting of notice. Therefore, no reliance whatsoever can be placed on the certificates of posting under which notices were allegedly served to the shareholders. Furthermore, the relations of the petitioner and the respondent No. 2 had become sour since 2009. Therefore, sending the notice through UPC for holding AGM where the appointment of new directors, who are the wife and son of the respondent No. 2 was to take place cannot be said an act done in bona fide. I am, therefore, of the view that the said AGM purportedly held on 15th June, 2010, in the absence of the petitioner without serving him a proper and valid notice for regularisation of the respondent Nos. 3 and 4, viz. Mr. Prasanna Vinay Kumar Kothari and Mrs. Chayadevi Vinay Kumar Kothari as an additional director to the post of director is invalid, illegal, non est and deserves to be quashed. Now ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... null and void as being not in accordance with legal provisions. The settled law is that an illegal act need not be oppressive and vice versa. It is on record that except the petitioners' group, all other shareholders had attended that meeting and from the minutes we find that the members were conscious of the financial crunch faced by the company and, therefore, has decided to allot the shares to the 3rd respondent who had been looking after the company as a licensee from the year 1995 onwards. In other words, the members had taken decision to allot the shares in the interest of the company. Even though the provisions of section 81(1A) of the Act are not applicable to the company, nor there is any provision in the articles for proportionate allotment, yet substantive majority of the shareholders had approved allotment of the entire 2,000 shares to the 3rd respondent. Since the shareholders have taken the decision to allot the shares in the interest of the company to an outsider notwithstanding the infirmities that we have noticed in the conduct of the EGM, we do not propose to nullify this allotment on the ground that it is an act of oppression, Even though the petitioners have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... garding affairs of a company. The acts of directors in a private limited company are required to be tested on a much finer scale in order to rule out any misuse of power for personal gains or ulterior motives. Non-applicability of section 81 of the Companies Act in case of private limited companies casts a heavier burden on its directors. Private limited companies are normally closely held, i.e., the share capital is held within members of a family or within a close knit group of friends. This brings in considerations akin to those applied in cases of partnership where the partners owe a duty to act with utmost good faith towards each other. Non-applicability of section 81 of the Act to private companies does not mean that the directors have absolute freedom in the matter of management of affairs of the company. The hon'ble Supreme Court further held that: Therefore, if the directors fail to act in the manner prescribed above they can in the sense indicated by us earlier be held liable for breach of trust for misapplying funds of the company and for misappropriating its assets. The learned counsel for the appellant argued that articles of association of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... propriety of issue of additional share capital by the managing director in his own favour. The facts of the case do not pose any difficulty particularly for the reason that the managing director has neither placed on record anything to justify issue of further share capital nor it has been shown that proper procedure was followed in allotting the additional share capital. Conclusion is inevitable that neither the allotment of additional shares in favour of Ramanujam was bona fide nor it was in the interest of the company nor a proper and legal procedure was followed to make the allotment. The motive for the allotment was mala fide, the only motive being to gain control of the company. Therefore, in our view, the entire allotment of shares to Ramanujam has to be set aside. (iii) In the case of Tea Brokers (supra), it has been held as follows: [T]he object of requiring' a proper notice of the purpose for which the meeting is to be held is to enable a member to exercise his own judgment as to whether he will attend the meeting or not. The agenda in the notice does not indicate that the company was in an urgent need of finance at that time, the further shares would be mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... learned PCS appearing for the respondents submitted that on 4th July, 2011, a notice was sent to the petitioner informing him for convening and holding an EGM to be held on 25th July, 2011, at which the resolutions were passed for increase in the authorised share capital from ₹ 5 lakh to ₹ 25 lakh, according to the learned PCS the allotment of 2,10,000 shares was made on 26th July, 2011, pursuant to the resolution passed in the EGM which took place on the said date. Further, a letter of offer was issued on 1st July, 2011 for allotment of 2,10,000 shares as rights shares. The learned PCS pointed out that a notice dated 1st July, 2011, was issued to the petitioner for informing him the date of the Board meeting which was to be held on 26th July, 2011. The learned PCS submits that since the petitioner did not prefer to remain present in the said meeting and, hence, decisions were taken in his absence. Furthermore, according to him the allotment of further shares was necessary to meet the urgent requirement of the funds by the company. I have considered the rival submission and perused the record. In the present case, the respondents have not alleged that the petitioner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irs of the company and oust the petitioner altogether from his participation in the management. In my view, the alleged EGM and the Board meetings under challenge are illegal, non est and liable to be set aside. I, therefore, hold that the allotment of further shares to the respondent No. 2 himself and his family members, i.e., respondent Nos. 3 and 4 are illegal, ultra vires, null and void and liable to be cancelled. The petitioner has also made serious allegations on the respondents saying that upon being insisted by the petitioner for filing of annual accounts and the balance sheets by holding the AGM, by getting the accounts audited from a chartered accountant, in spite of his insistence, the respondent No. 2, neither appointed the statutory auditor of the company officially nor completed the audit of the accounts for the last four years. The respondent No. 2 also did not call AGM under section 166 read with section 20 and other applicable provisions of the Act. To meet out the said default, according to the petitioner, the respondent Nos. 2 to 5 appointed a chartered accountant, Mr. Sagar Kawna as statutory auditors and his appointment has been shown ante-dated with effect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uently, Hedda Chemicals (P.) Ltd. filed a criminal complaint in the criminal court at Aurangabad in which the respondents were also involved, had to agree to return the amount of ₹ 70,00,000 to the said party in their individual and personal capacity in addition to ₹ 5,00,000 by way of compensation. Having considered the rival submissions and upon careful analysis of the documents filed by the parties in support of their respective allegations and counter-allegations, I have come to the conclusion that there appear financial irregularities in the company and such financial mismanagement is prejudicial to the interest of the company as defined under section 398 of the Act. However, all the loss to the company on account of financial irregularities can be ascertained by an appointment of an independent auditor who may conduct the audit of the company with effect from 31st March, 2009, until the date of the petition to find out the exact loss caused to the company on account of misdeeds committed by both the sides. Placing reliance upon the decisions in the cases of Srikant Datta Narasimharaja Wadiyar v. Sri Venkateswara Real Estates Enterprises (P.) Ltd. [1992] 7 CL ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, but that otherwise the facts would justify the making of a winding up order on the ground that it was just a equitable that the company should be wound up; also stands proved . For the reason discussed hereinabove, I have come to the conclusion that the acts complained of and the conduct of the respondents towards the petitioner narrated hereinabove are unfair, prejudicial, wrong, harsh and burdensome and there is an element of lack of probity and fair dealing and they are containing till date. The petitioner has succeeded to make out a case under sections 397 and 398 of the Act. Therefore, in order to bring an end to the acts of complained off. The petition is therefore, disposed off with the following directions: (i) It is declared that the purported EGM held on 7th July, 2011 is non est illegal and ultra vires and the resolution passed there at to the extent it relates to the removal of the petitioner as a director is invalid, ineffective and not binding and the same is hereby set aside. The petitioner is reinstated to the post of director with effect from the said date with all consequential benefits. Let statutory form be filed with the RoC within a period of 30 days ..... X X X X Extracts X X X X X X X X Extracts X X X X
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