TMI Blog2008 (10) TMI 693X X X X Extracts X X X X X X X X Extracts X X X X ..... ipundi ( the properties ) and purchased in the name of the second respondent out of the Company's funds. 2. Shri R. Varadarajan, learned Counsel, while initiating his arguments in support of the petitioners, submitted: The Company has been promoted in December 1986 by the first petitioner and the third respondent, being the first directors, with the main object of carrying on the business of agency and construction activity, with respect to civil and installation of transmission lines, electrical equipment and telecommunication works. The third petitioner and his family had invested ₹ 11 lakhs towards share capital (Rs. 4 lakhs) and unsecured loans (Rs. 7 lakhs). The petitioners' group hold 8100 shares of ₹ 100 each, constituting about 48 per cent of the share capital, while 8555 shares are held by the respondents. The second respondent was appointed at the Board meeting held on 2-1-1987 as President of the Company, with authority to represent the Company in all matters and sign tender documents on behalf of the Company. The second respondent later became director with effect from 24-2-1989. The third petitioner employed in Muscat/Oman since the year 1978 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dice to the Company and its shareholders. The sale is against the interests of the Company and its shareholders and hit by the provisions of Section 52 of the Transfer of Property Act, 1882. The sale of the properties effected by the second respondent in favour of TVP as well as sale by TVP being sham transaction must be set aside. Furthermore, the sale by TVP is in violation of the CLB order, which is a decree and executable in terms of Section 634A of the Act and therefore, must be set aside. The properties are divisible and the Company can be allotted a part of the properties in proportion to the consideration remitted by the Company. The respondents failed to account for the amounts realised out of the properties of the Company. The respondents misappropriated the secret profits for personal needs and must be surcharged for misappropriation of monies and properties of the Company. The respondents 2 and 3, despite the advice of the third petitioner entered into contracts indiscriminately with various customers, without incorporating any escalation clause , which led to liquidity crunch and bankruptcy of the Company, on account of increase in cost of the projects. The Company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Company's banker and the statutory auditor, produced before the Bench. After much persuasion, the second respondent produced at the Board meeting held on 30-7-1993, an ad hoc statement of accounts with respect to Kuwait operations, disclosing the receipts and receivable for the period from 23-9-1991 to 30-11-1993, according to which the Company had assets worth KD. 21,427.555 in its custody and it was to realize receivables of K.D. 8102.447. The respondents 2 and 3 disposed and enjoyed proceeds of office furniture, fittings, vehicles etc. of the Company amounting to K.D. 22,927.555. It is only on account of the prejudicial acts of the respondents, the Company defaulted in repayment of SBI dues and further compelled the petitioners to take corrective action against the second respondent in accordance with the minutes of the meeting dated 5-11-1993. The respondents 2 and 3 offered to settle 2/5th of SBI dues and for the balance suggested to proceed against the petitioners in terms of their communication dated 24-8-1998. This shows the conduct of these respondents. In the civil suit filed by the petitioners (O.S. No. 5458 of 2000 before the City Civil Court, Madras) the grievance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit and loss accounts have been inflated and are mere book entries. There was no need for the respondents 2 and 3 to lend any money, when the Company came to be closed for want of any business and was to be wound up. The respondents without getting the accounts approved by the members, misappropriated the funds realised from the Company's customers, pursuant to the awards obtained by the Company. Thus, the Company's affairs are being conducted in a manner prejudicial to the interest of the Company and its shareholders. When the petitioners filed O.S. No. 5458 of 2000, before the City Civil Judge Court, Madras, for rendition of accounts by the respondents 2 and 3, the respondents herein contended that the Civil Court is not the forum to entertain such allegations. The respondents while contesting C.S. No. 105 of 2001 before the High Court of Madras, filed by the petitioners, contended that the allegations of oppression or mismanagement in the affairs of the Company cannot be considered by the High Court. Therefore, the plea of forum shopping raised by the respondents does not arise. The petitioners have always been challenging the correctness of the accounts in the ear ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , failure of which would amount to lack of probity and hence it is oppression. The statutory auditor ought to have followed the accounting standards to ensure true and fair view of the accounts. The books of account produced in the present proceedings have no evidentiary value. The accounts should be re-casted from the year 1991-92 till date. 3. Shri Varadarajan, learned Counsel, in support of his legal submissions relied on the following decisions: B.R. Kundra v. Motion Pictures Association [1978] 48 Comp. Cas. 536 (Delhi) to show that the Court has power under Sections 402 and 403 to regulate the management of the Company during the pendency of a petition under Sections 397 and 398 and thereby the Court can exercise jurisdiction, in relation to an event which has occurred during the pendency of the petition under Sections 397 and 398. Bhajirao G. Ghatke v. Bombay Docking Co. (P.) Ltd. [1984] 56 Comp. Cas. 428 (Bom.) to show that no reliance could be placed on the register of members or other records reconstituted after filing of the petition. V.G. Coelho v. Silver Cloud Estates (P.) Ltd. [2001] 33 SCL 662 (Chennai) to show that delay and laches in moving the CLB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pute on rights or interests in immovable property is pending, by private dealings which may remove the subject-matter of litigation from the ambit of the court's power to decide a pending dispute or frustrate its decree. Alienees acquiring any immovable property during a litigation over it are bound by the doctrine of lis pendens, by the decree passed in the suit even though they may not have been impleaded in it. The whole object of the doctrine of lis pendens is to subject parties to the litigation as well as others, who seek to acquire rights in immovable property, which are the subject-matter of a litigation, to the power and jurisdiction of the Court so as to prevent the object of a pending action from being defeated. Dhanalakshmi v. P. Mohan 2005 (2) CTC 254 to show that Section 52 of the Transfer of Property Act prohibits transfer of property which is directly or specifically involved in a suit or proceedings, which is not collusive, in a manner that will affect the rights of any other parties, except under the authority of the Court and on such terms as the Court may impose. The Explanation to this section provides that pendency of the suit shall be deemed to comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and after sale in favour of Perianna Nadar is clearly hit by lis pendens. The further sale of 81 cents by Kondappa Naicker and his wife Dhanalakshmi to several persons as house sites is also hit by lis pendens and all the sales are non est in the eye of law. Puran Chand Nahatta v. Monmothe Nath Mukherjee AIR 1928 PC 38 to show that where during the pendency of a suit brought against the trustees for the construction of the trust deed, to ascertain the respective rights of the parties interested thereunder, and for directions as to the administration of the trust, one of the beneficiaries alienates property covered by trust, the alienee takes the property subject to further orders and directions to be given by the Court in further proceedings in the same suit. Narayana Venkatachalamiah v. Putika Venkatiah AIR 1942 Mad. 24 to show that the Registrar or the authority appointed by him under the Madras Act 6 of 1932 is a Court for the purpose of Section 52 of Transfer of Property Act. Manish Mohan Sharma v. Ram Bahadur Thakur Ltd. [2006] 67 SCL 91 (SC) to show that (a) powers under Section 402 are residuary in nature and in addition to the powers available to the CLB un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iew of which they are not entitled to any discretionary reliefs in the present proceedings. The allegations in C.S. No. 105 of 2000 are more or less the grievances in the present company petition. The petitioners have abused the process of law by approaching the CLB and are guilty of laches in relation to the past acts and transactions, which cannot be agitated in a Section 397/398 proceeding. The Board minutes dated 11-4-1991 reveal the problems faced by the Company in execution of MTNL contract at Delhi and the Board was conscious of the arbitration proceedings on account of the disputes in relation to settlement of TCIL final bills. All the dues of the Company including SBI were settled on account of the efforts taken by the respondents, from and out of the amount realised from KSEB, TCIL and other customers, which are reflected in a series of correspondence produced before the Bench and thereby acted bona fide and in the interest of the Company. The petitioners never initiated any action since the year 1994 either as directors or shareholders and no complaint has been made against the respondents 2 and 3 on account of non-convening of any board meeting by them. The action of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tarted evincing interest, when the respondents successfully brought to an end all the litigations against the Company. The petitioners are parties to the acts complained of by them and therefore, no equity lies in their favour to invoke the jurisdiction under Section 397/398 of the Act. The petitioners have not given full particulars of the alleged acts of oppression and mismanagement. This Bench, with vague allegations of misappropriation and misapplication of funds, siphoning of funds, mismanagement or improper conduct in the management cannot investigate into the affairs of the Company. The petitioners being directors or whole-time or executive directors in charge of the day-to-day affairs of the Company cannot complain of any mismanagement. Furthermore, the petitioners forming part of the Board failed to discharge their duties safeguarding the interest of the Company. The first petitioner had on 3-11-1993 took away two volumes of minutes books kept under the custody of the Company Secretary of the Company, without the latter's knowledge and never returned back, in spite of repeated requests made by the Company Secretary. The correspondence exchanged among the parties, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the initiate to get the properties registered by organizing on his own a sum of ₹ 1.5 lakhs which amount has been treated as a loan to the Company. The properties came to be registered in the name of the second respondent with the knowledge of the third petitioner and it is not the intention of the second respondent to claim the properties of his own and that is why the properties were given as security for the amounts borrowed by the Company from SBI. The Company suspended its business and did not have any income since the year 1991 and decided to sell the properties to settle the dues. The Company was trying for the last 8 years to sell the properties, but could not find out any buyer. The first petitioner made attempts through some media for selling the properties to enable the respondents to settle SBI dues, but it never happened. The second respondent was compelled to sell the properties to TVP through his Power Agent, Shri Thankaprakas by a sale deed dated 5-1-2006, which has been explained by the former. Thus, the sale of the properties was in the interest of the Company and the sale consideration was utilised to discharge the Company's liabilities. The name of TVP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in favour of the respondents, as they had been nurturing the companies even while facing the brunt of various criminal cases and had parted with over ₹ 25 crores in settling claims. The petitioners claiming to be the largest shareholders and directors of the company, ran shy of facing various criminal cases for many years, but sought to take over the companies when they had started turning the corner which could not in equity be permitted; and (b) the petitioners had not come with clean hands, as they had suppressed the information about the civil suit and sale of the shares to a third party. Therefore, the prayers sought for by the petitioners were not granted by this Board; Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp. Cas. 743 (SC). Every action in contravention of law may not perse be oppressive for the purpose of Section 397 of the Companies Act, 1956; a resolution passed by the directors may be perfectly legal and yet oppressive and conversely a resolution which is in contravention of the law may be in the interests of the shareholders and the Company. An isolated act, which is contrary to law, may not necessarily ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ho purchased the properties for his own use, as borne out by the sale deed No. 2453 of 1989, the encumbrance certificate and the patta bearing No. 1519. The second respondent need not obtain the approval of the shareholders for selling the properties, since they do not belong to the Company. The second respondent having every right to deal with the properties as he deems fit, sold the same in July, 2006 to TVP and received the entire sale consideration, upon which TVP sold the properties in favour of Shri Mangilal and TVP may be permitted to register the sale deed in favour of Shri Mangilal. The allegations that (a) properties are shown in the balance sheet; (b) consideration for the properties has been paid out of the funds of the company; (c) annual report dated 4-10-1989 discloses the acquisition of properties by the Company; and (d) properties were offered as collateral security to SBI are baseless. Shri R. Harishankar, learned Counsel representing TVP, adopted the arguments of Shri T.K. Seshadri, learned Senior Counsel, on sale of the properties. 7. I have considered the pleadings and arguments of learned Counsel for the parties. The main grievances of the petitioners in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gations of the nature mentioned in the suit can be considered on merits. The petitioners 1 to 3 herein and the wife of the third petitioner filed yet another civil suit in C.S. No. 105 of 2001 against the respondents 1 to 3 herein, seeking directions against them to render accounts of the Company from the year 1993 and an order restraining the respondents 2 and 3 from operating the bank accounts of the Company in India or Kuwait and attach the properties of the respondents 2 and 3 till the rendition of the accounts of the Company. The respondents while contesting C.S. No. 105 of 2001 categorically contended that the allegations of oppression and mismanagement in the affairs of the Company cannot be considered by the High Court, as the provisions of the Act specifically provide remedies and reliefs for any acts of oppression and mismanagement. The respondents herein having objected to the jurisdiction of the Civil Court and High Court are estopped from questioning the jurisdiction of the CLB in the present proceedings and thereby not to play hot and cold as held in Nalam Satya Prasada Rao's case (supra). Nevertheless, the fact remains that the petitioners have withdrawn all the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad . The Board only empowered the second respondent to represent the Company and execute all the documents in connection with the contracts entered into by the Company, but never authorised him to approve any contract on behalf of the Company, in which event, the Board of directors including the petitioners 1 and 3 ought to have exercised due diligence at the time of approving any of the contracts, and therefore, the second respondent cannot alone be faulted for non-inclusion of any escalation clause in the contracts entered into by the Company. The Board of directors reviewed from time to time the progress achieved in the projects undertaken by the Company as borne out by (a) Board minutes dated 15-5-1989, according to which the directors present, namely, the third petitioner and the second respondent deliberated the business operations on account of the projects in Tamilnadu, Andhra Pradesh, Karnataka, Kerala and Delhi; (b) Board minutes dated 6-9-1991 reviewing the general progress made in various projects of the Company, by the petitioners 1 and 3 and the respondents 2 and 3; (c) Board minutes dated 11-4-1991, reviewing the progress of the Company, by the petitioners 1, 3 and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Director of the Company be and are hereby authorised to execute the documents for the purpose of registration of the following land on behalf of the Company. The land situated as survey No. 428, (4A1, 4A2A, 4B1, 4D, 7A1, 7 A2, 7A3, 7B, 7C, 7D, 8A1, 8A2, 8B) Sirupuzhalpettai, Gummidipundi Taluk, Anna Chengai District. Further resolved that the cost of the land to be payable to the seller is ₹ 625 (Rupees Six hundred and twenty five only) per cent. It is evident from the aforesaid Board resolutions, to which the third petitioner and the respondents 2 to 3 were parties, that the second respondent was authorised to execute the sale deed in respect of the properties on behalf of the Company and not in his personal name. The directors' report dated 4-10-1989 signed by third respondent reads, inter alia, thus: ...your Directors are also pleased to inform you that four acres of land valued at ₹ 3 lakhs has been acquired near Gummidipundi Industrial area at Gummidipundi . The share holders were made to believe that the properties were acquired by the Company for ₹ 3 lakhs. At the Board meeting held on 11-4-1991, the directors comprising of the petitioners 1 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r of the land was insisting Respondents G. George took initiative to get registered the land by organizing finance as his own for ₹ 1.5 lakhs and the said amount is treated as a loan to the company. The amount of ₹ 1.5 lakhs paid by the second respondent towards a part of purchase consideration of the properties has been indisputably treated as a loan in favour of the Company. At the same time, the second respondent had acquired the properties in his personal name and not in the name of the Company, in breach of his fiduciary duty as director of the Company. The tests laid down by the Supreme Court in Kamal Kumar Dutta s case (supra) that the directors of a company are in a position of trustee, who should conform to probity and their conduct should be above suspicion have not been satisfied by the second respondent on account of his failure to acquire properties in the name of the Company. Nevertheless, the second respondent claiming to be the absolute owner of the properties, by virtue of a general power of attorney dated 21 -12-2005, appointed Shri K.A. Thangaprakasam as his lawful attorney to sell the properties, receive consideration, execute necessary sale deed an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roceedings. The object of doctrine of 'lis pendent' is (a) to thwart any attempts by the litigants to circumvent the jurisdiction of a Court, in which disputes in relation to properties are pending, thereby removing the subject-matter of the litigation from the ambit of the Court's power or frustrating its decree, as held by the Supreme Court in Rajendar Singh's case (supra); (b) to protect a property under litigation, and (c) not to allow any litigant to give others any property under dispute causing prejudice to the opposite party, in the light of the decision in Kuppusamy's case (supra), wherein the Court declared that the sale of the properties by the litigant to several others, during the pendency of the suit, is non est in the eye of law. There is a statutory bar under Section 52 of the TP Act against alienation of any property involved in a proceeding, without the authority or the prior permission of the Court, as laid down in Dhanalakshmi's case (supra) and G. Krishnamoorthy (supra). The Privy Council held in Puran Chand Nahatta's case (supra) that any purchaser of the property during the pendency of a suit, can enjoy the property subject to any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the properties at a price of ₹ 3 lakhs per acre, which would amount to ₹ 12 lakhs for the whole of properties. This would mean that the properties valued ₹ 12 lakhs as at February 1993 were sold after a period of 13 years during the pendency of the company petition on 5-1 -2006 only for an amount of ₹ 2.80 lakhs, which is highly improbable, in view of the general increase in price of landed properties at the relevant time. I may point out that the purchaser, namely, TVP, who is none other than son of the power agent of the second respondent, has further effected sale of the properties for ₹ 4.12 lakhs in favour of Mangilal, gaining ₹ 1.32 lakhs within a very short span of time. The respondents did not choose to establish the current market value of the properties by production of any material, in the absence of which, the sale of entire properties for a meagre profit of ₹ 30,000 after a period of 17 years cannot be considered to be a bona fide transaction on the part of the second respondent or in the paramount interest or for the benefit of the Company. The action of the second respondent in sale of properties for ₹ 2.80 lakhs to TV ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e income and expenses as well as treatment of profits on account of Kuwait operations, as put forth by the second respondent at the Board meeting of 6-9-1991 read as follows: O/R. G George, Director of the Company stated that 3 per cent of the receivable at Kuwait is freely transferable to head office towards Head Office expenses and the same can be accounted in Kuwait Branch A/c. and also the profit if any after meeting all local expenses of Kuwait to Head Office in India. Income and expenses for any Kuwait project will not be shown in Unicentre Balance sheet in India as neither Head Office of unicentre nor Government of India give any facilities such as Bank guarantees or any securities etc. to do the business in Kuwait. However any Contract is taken with the above facilities, the project account shall be projected in the balance sheet. The remittance as goodwill of the Company and services rendered for sending the people continue. The Board appreciated the above proposal of the second respondent, who in his communication of September 1991, while intimating SBI the reparable amount to India amounting to KD. 113,800 on account of Kuwait operations, categorically gave his co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent, without her approval, would be against the bye-laws of the Company, and therefore would not have any legitimate value. The directors at an informal meeting held on 22-12-1993 at the office of M/s. Anil Nair Associates, Chartered Accountants, Chennai, as borne out by the fax messages dated 6-1-1994, 7-1-1994, 8-1-1994 and 11-1-1994 exchanged between the Chartered Accountants and the second respondent, deliberated on the issues relating to the status of on going contracts undertaken by the Company, sale of the properties and furnishing of details of Kuwait operations to the statutory auditors for incorporation in the Company's balance sheet, without however, taking any conclusive decisions in any of those matters. The sequence of events supported by documentary evidence would establish that the second respondent has been wholly and solely responsible for the Kuwait operations undertaken on behalf of the Company. There is no material produced by the respondents accounting for the entire Kuwait operations at any point of time. The respondents 2 and 3 being directors are occupying the position of trustees and answerable for the income generated on account of Kuwait operation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... perations during the period between 6-9-1991 and 5-11-1993. It is relevant to point out that the petitioners 1 to 3 herein and wife of the third petitioner in C.S. No. 105 of 2001 have sought directions against the respondents 1 to 3 to render accounts of the Company from the year 1993 till the date of filing the suit and thereafter. It is found from the records made available before the Bench by both parties, including the balance sheets, directors' report and auditors' report for various years that the second respondent has not accounted for Kuwait operations for the period from 6-9-1991 to 5-11-1993 and therefore, bound to render accounts on account of Kuwait operations for the relevant period. The third respondent herein specifically averred in the written statement filed as early as in March 2002 in O.S. No. 5458 of 2000 that the Company had, for want of any restrain order, convened the annual general meeting of the Company on 30-8-2000, pursuant to the notice dated 5-8-2000 and adopted the accounts for the period ended 31-3-2000 and further categorically contended that These defendants submit that all the accounts up to 31-3-2000 were duly placed at the AGM of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... account of non-compliance with statutory requirements by the respondents 2 and 3 for the period from 1993 to 2003 are ill-founded. Against this background, the action of the petitioners in having conducted a detailed search of the records of the Company maintained at the Registrar of companies, as borne out by a report dated 29-12-2003 of Shri R. Kannan, Practicing Company Secretary, apart from being belated lacks bona fides on their part. If the petitioners had exercised due diligence and prudence without causing any delay, they ought to have known with little doubt, the approval and adoption of the balance sheet and profit and loss account of the Company for the year ended (i) 31-3-1989 at the annual general meeting of 30-9-1989; (ii) 31-3-1990 at the annual general meeting of 29-9-1990; (in) 31-3-1993 to 31-3-1999 at the annual general meeting of 28-6-2000; (iv) 31-3-2000 at the annual general meeting of 30-8-2000; (v) 31-3-2001 at the annual general meeting of 20-5-2001; (vi) 31-3-2002 at the annual general meeting of 16-6-2002 and (vii) 31-3-2003 at the annual general meeting of 18-8-2003. The petitioners having acted callously cannot throw any blame on the respondents, thereb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany was not carrying on any business, appears to be genuine. Nevertheless, none of the beneficial actions of the second respondent, towards welfare of the Company, justifies the sale of properties by him in favour of TVP or sale by TVP in favour of Mangilal or non-rendition of accounts on account of Kuwait operations for the reasons discussed elsewhere. The properties have been purchased for a sum of ₹ 2.50 lakhs, which was met by the Company to a tune of ₹ 1 lakh which works out to 40 per cent of the total consideration of ₹ 2.50 lakhs and the balance considerations was paid by the second respondent from and out of his resources. The Company would therefore, be entitled for 40 per cent of the total extent of the properties, registered in the name of the second respondent, accounting for 1.60 acres out of the total extent of 4.01 acres of land. The sale of properties having found to be irregular and oppressive must be set aside, in the paramount interest of the Company and its shareholders, upon which 1 acre and 60 cents of the land shall be restored to the Company, as putforth on behalf of the petitioners, in the course of oral submissions, thereby enabling ..... X X X X Extracts X X X X X X X X Extracts X X X X
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