TMI Blog2004 (11) TMI 597X X X X Extracts X X X X X X X X Extracts X X X X ..... the petitioners for any relief and the CLB should look into only the averments made in the company petition as to whether the same shall be rejected or not in line with a civil suit under Order 7, Rule 11(1) of the CPC, as held in State of Orissa v. Klockner and Company - AIR 1996 Supreme Court 2140. o The main grievances of the petitioners are (i) removal of the first petitioner as the Managing Director of the Company (ii) removal of the second petitioner as a director of the Company and (iii) nonpayment of the balance of amounts under the settlement agreement. These grievances of the petitioners in relation to the affairs of the Company have been resolved and mutually settled by means of an agreement entered into between the petitioners and respondents on the following terms and conditions: i. The petitioners shall exit from the Company both as shareholders and as directors; ii. The, petitioners shall sell their shares in the Company on or before 31.10.2003; iii. The respondents shall pay the petitioners a sum of Rs,135 lakhs towards sale consideration of the shares of the petitioners in four instalments, the last of which shall be payable on or before 24.03.2004; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der Section 397 and 398, by which the CLB could take cognisance of only the continuing acts of oppression or mismanagement as held in Shanti Prasad Jain v. Kalinga Tubes Ltd. - (1965) XXXV CC 351 and C.B. Pardhanani v. M.B. Pardhanani- (1990) Vol. 69 CC 106. o The provisions of Section 397 and 398 are preventive in nature and cannot remedy any past act as held in Palghat Exports Private Ltd. v. T.V. Chandran - (1994) 79 CC 213 and Raghunath Swarup Mathur v. Har Swarup Mathur - (1970) 40 CC 282. o Regulation 44 of the Company Law Board Regulations, 1991 is analogous to the provisions of Section 151 of the Code of Civil Procedure, 1908, Section 482 of the Code of Criminal Procedure and Rule 41 of Customs, Excise Gold (Control) Appellate Tribunal (Procedure) Rules, 1982 envisaging the inherent power of the Civil Court, High Court and the Tribunal respectively, to make such orders as may be necessary for the ends of justice or to prevent abuse of the process of the court. The CLB in exercise of the inherent power as well as under Regulation 44 of the Company Law Board Regulations, 1991 is empowered to dismiss the company petition to secure the ends of justice or to prevent abus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... However, the respondents have adopted delaying tactics by taking an untenable plea that the company petition does not meet the requirements of Sections 397 and 398, which is nothing but a sheer abuse of process of law and the CLB. By virtue of Section 10E(1A), the Company Law Board shall exercise and discharge such powers and functions as may be conferred on it by or under the Act or any other law and regulate its own procedure and shall be guided by the principles of natural justice and act in its discretion as envisaged in sub-sections (5) and (6) of Section 10E. Every Bench constituted by the CLB is vested with the powers of a Civil Court, while trying a suit under the Code of Civil Procedure, 1908 in respect of the matters specified in sub-section (4C) of Section 10E. The CLB having trappings of a civil court has to do substantial justice with regard to the alleged acts of oppression and mismanagement Under Sections 397 and 398. Whether the grievances set out in the company petition are oppressive of the petitioners or prejudicial to their interest or the interest of the Company must be adjudicated by the CLB. It is for the CLB to consider whether the matters complained of i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er pleaded or established by the respondents to strike off the company petition. Regulation 44 enables the CLB to do substantial justice between the parties and cannot be abused to file a frivolous application by any litigant. The Company is a family owned private limited company, wherein the petitioners have put forth all their efforts and investments to achieve the enormous growth presently gained by the Company. The settlement agreement has not been implemented entitling the petitioners to agitate their rights Under Sections 397 and 398, so long as the petitioners remain members of the Company holding 40% of the shares and having financial stake by way of personal guarantee to secure the bank loans taken by the Company. Under the guise of the settlement agreement, the petitioners have been completely excluded from the management of the Company, which is harsh and burdensome of the petitioners as well as the Company and this oppressive act continues till date which shall be remedied by the intervention of the CLB. The alleged oppressive acts are questions of fact which must be adjudicated in the present proceedings and not to be summarily dismissed as sought by the respondents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 397. It must further be shown that the conduct of the majority shareholders was oppressive to the minority as members and this requires that events have to be considered not in isolation but as a part of a consecutive story. There must be continuous acts on the part of the majority shareholders, continuing upto the date of petition, showing that the affairs of the company were being conducted in a Manner oppressive to some part of the members. The conduct must be burdensome, harsh and wrongful and mere lack of confidence between the majority shareholders and the minority shareholders would not be enough unless the lack of confidence springs from oppression of a minority by a majority in the management of a company's affairs and such oppression must involve at least an element of lack of probity or fair dealing to a member in the matter of his proprietary rights as a shareholder. The Kerala High Court in Palghat Exports Private Limited v. T.V. Chandran (supra) - while considering the court's jurisdiction under Section 397 categorically held that past acts which have come to an end would not be taken for the purpose of invoking the court's jurisdiction under Sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that gave rise to the above observation of the Supreme Court . The remedy provided by these sections is of a preventive nature so as to bring to an end oppression or mismanagement on the part of controlling shareholders and not to allow its continuance to the detriment of the aggrieved shareholders or the company. The remedy is not intended to enable the aggrieved shareholders to set at naught what has already been done by controlling shareholders in the management of the affairs of the company. If such were the intention of the Legislature, which as I will presently show it could never have been, the language of Sections 397 and 398 would have been different and the Legislature would not have confined the power of the court by limiting the purpose for which it can be exercised under the sections. The Allahabad High Court while considering the powers of the court under Sections 397 398 in Raghunath Swarup Mathur v. Har Swarup Mathur (supra) categorically held that The powers of the court under the two sections are designed for removal of an existing and not past oppressive or prejudicial course of conduct of the affairs of the company. They are primarily intended for preventi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners 1 2 with participation of the respondents 5 7, with paid-up capital of ₹ 15,000/- consisting 150 shares of ₹ 100/-each held equally among the second petitioner and the respondents 5 7. As at 31.03.1996 the Company had received share application money to the extent of ₹ 20 lakhs of which the petitioner family contributed 25%, the second respondent family 35% and the seventh respondent family contributed the balance of 40%. In due course of time, the second respondent took over the cement unit and the first petitioner became the Managing Director of the Company in January 1997 looking after its day to day management. As at 31.03,2000, the petitioners collectively came to hold 40% of the shares of the Company, the second respondent family 40% and the balance of 20% of the shares by the seventh respondent. The Company is nothing but a partnership run based on the principles of partnership. The Company could achieve a phenomenal growth under the stewardship of the first petitioner, who is solely instrumental in developing the business, thereby wiping out the entire accumulated loss, reducing the term loan and other liabilities of the Company, achievi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... share certificates together with the signed transfer deeds to K. Rangarajan, one of the mediators, who must hold them in trust until the amounts due under the agreement are fully paid by the respondents to the petitioners. Though the respondents have paid an aggregate sum of ₹ 50 lakhs to the petitioners, failed to settle the balance amount of ₹ 85 lakhs in terms of the agreement entered into between the parties. At the same time, the respondents have removed the second petitioner from the post of director under section 284 of the Act, at the extraordinary general meeting purportedly held on 05.03.2004, during his absence in India between 02.03.2004 and 31.03.2004, without serving any notice preceding his removal. Furthermore, the respondents have filed form-32 with the Registrar of Companies on 24.03.2004 as if the first petitioner had resigned from the Board of directors on 07.02.2004 and that the second respondent was appointed as the Managing Director on 08.03.2004. Though the first petitioner along with his father and other relatives has incorporated a new company on 22.12.2003, yet never commenced any business in competition with the Company in tune with the agree ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y in his favour. The 1st Petitioner on account of the relationship believed that the 2nd/5th Respondents' family would at least pay him off for the years of effort put in by him for making this business grow. Instead of ensuring that matters are amicably resolved, the 2nd Respondent and the 5th Respondent have now grabbed the Company and have refused to perform their obligations under the Agreement. The above grievances independent of the agreement reached between the parties would, perhaps, satisfy the requirements of section 397/398. The releifs sought by the petitioners seeking directions against the respondents (a) to purchase the shares of the petitioners in terms of the agreement dated 24.10.2003 or at a value which may be determined by an independent valuer; and (b) to discharge the petitioners group from the personal guarantees furnished in favour of the bank are directly arising out of the alleged breach of the agreement dated 24.10.2003 on the part of the respondents group. The prayer for amending the Articles of Association of the Company entitling the petitioners group for the proportionate voting rights in a general meeting of the Company and for the proportion ..... X X X X Extracts X X X X X X X X Extracts X X X X
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