TMI Blog2004 (9) TMI 678X X X X Extracts X X X X X X X X Extracts X X X X ..... nvestigation in relation to the affairs of the Company. 2. Shri R. Murari, learned Counsel, while initiating his arguments submitted that the Company was formed in the year 1989 with main objects of carrying on the business of reprographics, design creations, making animations, photo type setting including computer software programmes etc. While the petitioners together hold 7500 equity shares of ₹ 10/-each, the respondent group is holding 92.14% of the paid up share capital of the Company. The first petitioner has been the director since the year 1990 and Chairman from the very inception of the Company. The second respondent who became an additional director in the year 1995, continued on the Board, but failed to take any initiative to convene the annual general meeting for the past three years and further excluded the first petitioner from the management and administration of the Company denying, among other things, access to the books of account of the Company. The Company by virtue of doing job work for certain foreign companies had received $ 1,87,030.5, which were misutilized by the second respondent to form new companies viz., M/s Venture Infosys Private Limited (V ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent had drawn huge cash from the account without any justification and misappropriated the same for his personal benefits. Though the respondents could explain utilization of certain foreign remittances received by the Company, yet there is no explanation or justification for the entire foreign inward remittances received by the Company. The second respondent illegally convened an extraordinary general meeting without any notice on 05.04.2002 of the meeting to the second petitioner and without any prior Board meeting for approving the proposal to hold the extraordinary general meeting, wherein the third respondent, his wife and fourth respondent, his brother-in-law were elected as directors of the Company, in spite of the objection made in writing by the second respondent, with malafide intention to exclude the petitioners from the management of the Company. None of the minutes of any of the meetings of the Company viz. Board meetings or general or annual general meetings are initialed or signed at each page and they are not dated and signed at the last page, by the first petitioner, as Chairman in terms of Section 193, in which case the legal presumption as provided under Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd on equitable consideration depending upon the facts of each case. 3. Shri V. Ramakrishnan, learned Counsel raised a preliminary objection that there are no pleadings to the effect that the facts of the present case would justify the making of a winding up order on just and equitable grounds, but such winding up of the Company would unfairly prejudice the petitioners, as stipulated in Section 397 (2) (b), in support of which relied on the following decisions: Hanuman Prasad Bagri v. Bagress Cereals Pvt. Ltd. - 2001 Vol. 105 CC 493 Shanti Prasad Jain v. Kalinga Tubes Ltd. - 1965 Vol. XXXV CC 351. Maharashtra Power Development Corporation Ltd. v. Dabhol Power Co. - (2003) 5 Comp LJ1 The petitioners having failed to plead their case falling within Section 397, cannot now be permitted to adduce evidence as held in Kalinga Tubes, Ltd v. Shanti Prasad Jain - (1964) I Comp.LJ 117 , wherein it has been held that for the purpose of determining whether the petition should be granted or not, the allegations in the petition must be looked at and cannot be traversed beyond that. No order could be made if sufficient cause is not alleged in the petition, even if s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... II filed by respondents) reflects the receipt and repayment of the loan amount by the Company. All self cheques drawn by the second respondent during the financial year ended 31.03.2001 and subsequent years have been duly and properly accounted in the audited financial statements for the respective years. The first petitioner having signed the financial statements for the year ended 31.03.2001 cannot now question the self cheques drawn during the year ended 31.03.2001. The Company borrowed ₹ 50,000/- by cheque from VATPL on 11.07.2001, through transfer of accounts which was repaid through cheque payment. The loan transaction with VATPL is duly reflected in the balance sheet for the year ended 31.03.2001 signed by the first petitioner and is binding on him. The Company had received only ₹ 4 lakhs to vacate the office premises from the landlord in two instalments of ₹ 2.5 lakhs in December, 2001 and ₹ 1.5 lakhs in July, 2002 which are properly accounted for in the books of account of the relevant financial year and utilised towards repayment of the loan obtained from Indian Bank by the Company, as borne out by the copy of the ledger account of the Company and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sued by VIPL relates to only data conversion, technical documentation services business which are nothing to do with the business carried on by the Company and further pointed out that none of the clauses in the memorandum of association of the Company used the word E-publishing . None of the clients of the Company is the client of VIPL. Thus, the business of the Company at no point of time has been diverted to any of the business concerns of the second respondent. According to Shri Ramakrishnan, learned Counsel the allegations of misappropriation and diversion of funds as well as business of the Company by the second respondent for his personal benefits being drastic in nature, no definite conclusion on the allegations of financial irregularities can be given merely on the basis of prima facie opinion especially when, the respondents have defended each of the allegations, as held in K.P. Balakrishnan Nair v. Vindya Tea Industries (P.) - Ltd. - (1999) 32 CLA 160 . The burden of proof for establishing the allegations of oppression; financial misappropriation etc. is on the petitioners and not on the respondents to dispute these allegations, in support of which learned Counsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of eleventh annual general meeting of the Company. The term of the first petitioner came to an end in 2001. At the 11th annual general meeting held on 27.11.2001, no resolution for his appointment was moved since the petitioner had already lost confidence of the majority shareholders and the Board of directors. At the same time the first petitioner did not offer himself for reappointment as a director at the annual general meeting, thereby he ceased to be a director since 27.11.2001. Even if the extraordinary general meeting was not held on 27.11.2001, it is settled law that a director would cease to hold office on the last date on which the annual general meeting ought to have been held as held in the decision of In re S.R.Y. Ramakrishna Prasad - (1963) XXXIII CC 548 . This decision cannot be confined to directors retiring by rotation, but would also apply regardless of whether directors retire by rotation or additional directors or directors retire in accordance with the terms of the appointment. In the present case, the first petitioner would have ceased to hold the office of director on 30.09.2001, the date on which the eleventh annual general meeting ought to have been h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... work out at ₹ 75,000/-. The petitioners are already paid ₹ 40,000/- in terms of the order of this Bench. The respondents are ready and willing to pay the balance amount of ₹ 35,000/- to the petitioners, upon which they should transfer their entire shareholding in favour of the second respondent. The petitioners must either hand over the two-wheeler belonging to the Company in their custody which is valued at ₹ 20,000/- or in the alternative the second respondent would adjust the value of two-wheeler from and out of the balance of amount of ₹ 35,000/- in full and final settlement of the disputes between the petitioners and the respondents. 4. Shri Murari, learned Counsel, in his reply contended that by virtue of Section 397(1), the petitioners are to establish that the affairs of the Company are conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members, upon which, the CLB under Sub-section (2) of Section 397 is to form an opinion as to whether the Company's affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members and that winding up of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed on behalf of the respondents, Shri Murari, learned Counsel, pointed out that the decision in re S.R.Y. Ramakrishna Prasad (Supra) is in regard to the situation, where the director retires by rotation. This is however is not applicable to the present case, where first petitioner does not retire by rotation, as envisaged in Article 38 of the Articles of Association of the Company, according to which directors of the Company are not subject to retirement by rotation. In the case of Sri Gopal Automotive Limited, (supra) though it is laid down the burden of proof lies on the person making allegations of fraud etc., to prove such allegations yet it is categorically held in para 23 of the judgment that atleast some details must be given in a case of allegation of misapplication or siphoning off funds. In the instant case, the petitioners have furnished much more details in regard to the financial irregularities in the affairs of the Company. In the light of the decision in K.P. Balakrishnan Nair v. Vindya Tea Industries (P) Ltd. , (Supra), it is not possible to give any definite conclusion on the allegations of financial irregularities, without the original documents, in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... make out a case for winding up of the company on just and equitable grounds. If the facts fall short of the case set out for winding up on just and equitable grounds, no relief can be granted to the petitioners. A careful consideration of the findings of the Supreme Court, suggests that in order to be successful on the ground specified in Section 397(2)(b), the petitioners have to make out a case (emphasis supplied) for winding up of the company on just and equitable grounds. The decision nowhere mandates the requirement that the petitioners have to plead that the facts would justify the making of a winding up order of the company on just and equitable grounds. A perusal of the decision in Maharashtra Power Development Corporation Ltd v. Dabhol Power Co. (2003) 5 CLJ 1 cited by Shri V. Ramakrishnan, learned Counsel, reveals that the following four requirements for the maintainability of a petition under Section 397 were raised before the Bombay High Court. i. the petitioner must prove continuous acts of oppression; a single act, howsoever oppressive, cannot be cause for filing of the petition; ii. the acts of oppression must continue up to the date of filing of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tioner from day-to-day affairs and management of the Company; (c) illegal removal of the first petitioner as a director of the Company; (d) illegal appointment of the respondents 3 4 as directors of the Company; and (e) financial mismanagement, misappropriation and misapplication of funds of the Company and diversion of business of the Company for personal benefits and personal concerns of the second respondent. Before going into the defence of the respondents that at the eleventh annual general meeting of the Company, held on 27.11.2001, which is under serious dispute, the first petitioner was not reappointed, on expiry of his term as director of the Company and further that even in the event of non-cozening of the annual general meeting on 27.11.2001, the first petitioner ceased to hold the office of director on the last date on which the eleventh annual general meeting was to be held, viz., 30.09.2001, it shall be examined whether directorial complaints shall be entertained in the facts and circumstances of the present case. Shri R. Murari, learned Counsel, forcibly argued that such complaints can be entertained in a Section 397 petition in the light of vari ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Murari, learned Counsel and therefore, in the present case the petitioners cannot, in my view, agitate directorial complaint on equitable grounds seeking any remedy under Section 397 on account of the exclusion of the first petitioner from day-to-day affairs and management of the Company. Under these circumstances, it would be futile to go into the validity or otherwise of the minutes of the annual general meeting held on 27.11.2001 and hence the same is not considered by me. In regard to the appointment of the respondents 3 4 as directors of the Company, the specific plea of Shri Ramakrishnan, learned Counsel is that the third respondent was a promoter director, as reflected in the Articles of Association of the Company. Though the third respondent had resigned from the office of director, she was subsequently appointed as an additional director, as borne out by the minutes of the meeting of the Board of directors held on 15.10.2000 and Form No. 32 dated 15.11.2000 filed with the Registrar of Companies. The third respondent was again appointed as director at the annual general meeting held on 14.11.2000 for a period of two years until the conclusion of the 12th annual general me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me, mere illegal, invalid or irregular acts by themselves, unless they are oppressive to any shareholder or prejudicial to the interests of the Company or to public interest, cannot support a petition under Section 397. It is not the petitioners' case that the appointment of the respondents 3 4 as directors is oppressive to any shareholder, including the petitioners or prejudicial to the interests of the Company or to public interest. When the question as to whether an act in contravention of law is per se oppressive came up before the Supreme Court in Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. - (1981) 51 Comp. Cases 743 , it was held that an act which is in contravention of law may be in the interests of the shareholders and the company. Moreover, it is the prerogative of the shareholders, as held in Winfred Investments Limited v. Mainstay Teleservices Private Limited (supra) to choose their own directors and the exercise of democratic power cannot be termed as an act of oppression or mismanagement. Any possible invalidation of the appointment of the respondents 3 4 as directors, would not in any way prevent the respondent group ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the first petitioner and not his scanned signatures. The plea of misappropriation of the foreign inward remittances by the second respondent towards formation of his new companies, viz., VIPL and VATPL lacks details. While the foreign inward remittances are reflected in the bank account statement for the period between 01.06.2001 and 30.06.2001, VATPL is said to have been incorporated in May 1994, the fact of which has not been denied by the petitioners and therefore there is no scope for utilization of the foreign inward remittances for incorporation of VATPL by the second respondent. There is no material to show that the second respondent had availed loans from the financiers for his own purpose. At the same time, the availment of loans by the Company from the financiers and the repayment of the said loans in their favour are accounted in the books of account of the Company and the bank account statement produced before this Bench. Similarly, the money transaction with VATPL is reflected in the balance sheet for the year ended 31.03.2000. The payment made to the third respondent is justified by way of bonus paid by the Company, though the appointment of the third respondent as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vouchers and other records of the Company, which may be found necessary for the period between 01.04.2001 and 31.03.2003 and also take into account the submissions of the petitioners and respondents to ascertain whether any money of the Company was misappropriated by the second respondent. If so, the second respondent shall reimburse the amount with simple interest at the rate of 10 per cent per annum in favour of the Company within 15 days of the receipt of the report from Shri Venkataraman. In view of the irreconcilable differences and loss of mutual trust between the petitioners and the respondents, the Company cannot run smoothly with the co-existence of both the parties. The only way to ensure the smooth functioning of the Company is that the warring parties must part ways by the exit of one group from the management of the Company. Towards this end, the petitioners, being minority shareholders will sell their shares in favour of the respondents, at a value to be determined by Shri Venkataraman as on 31.03.2003, in view of the unexplained cash withdrawals made during the financial years 2001-2002 and 2002-03. Both the petitioners and the respondents are at liberty to make t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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