TMI Blog1999 (6) TMI 483X X X X Extracts X X X X X X X X Extracts X X X X ..... se two respondents to compensate the company for the money misappropriated by them, declaration that the removal of the petitioner as a director is null and void, and cancellation of the rights issue made in 1994, etc. 2. This petition has a long history. Originally, the petitioners filed a petition on February 24, 1994, numbered as C. P. No. 7 of 1994. On filing of that petition, they sought certain interim reliefs relating to the rights issue made by the company and we gave certain directions in regard to the same. Since the respondents raised an objection on the maintainability of the petition in terms of Section 399 of the Act on the ground that the petition suffered from absence of valid consent, we gave the petitioners the liberty to file an amended petition and, accordingly, the present petition, viz., C. P. No. 15 of 1994, was filed on April 11, 1994. On April 21, 1994, we gave a direction that all decisions for disposal of trucks or closure of parcel offices or opening of agency offices would be taken only in board meetings. The petitioners, thereafter, filed an application, C. A. No. 83 of 1995, seeking permission to file evidence by way of affidavits and also for summ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s reiterated by us in the hearing on September 29, 1997. However, no progress could be made towards this end as the respondents were not agreeable for the same even though the petitioner was agreeable. 4. C. A. No. 65 of 1996 was heard on November 28, 1997, and we passed a detailed order on this application on December 18, 1997, rejecting the prayer of the petitioner for appointment of an administrator since the prayer emanated from subsequent events after filing of the petition. The petition was posted for hearing in April, 1998. In the meanwhile, since the petitioners had filed a list of witnesses to be examined and since the witnesses were in Andhra Pradesh, it was decided to record the evidence at Chennai, on June 9, 1998. At the request of counsel for the petitioners, summons to the witnesses were handed over to him for service. On this day, none of the witnesses could be produced by the petitioners for oral evidence and accordingly the recording of the evidence was closed. In the hearing held on September 8, 1998, it was reported by counsel for the petitioners that the first petitioner expired in July, 1998, and as such his legal heirs would have to be substituted in his p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents, submitted that this is a motivated petition on account of the strained relationship between the petitioner, being the son-in-law of the second respondent, and the second respondent. All the allegations made in the petition which are vague and false have to be viewed in this context. He submitted that the earlier proceedings in 1978, were dismissed on the merits and it is false on the part of the petitioner that due to his efforts, the petition was withdrawn and that there was a compromise. He also submitted that at any point of time the company had three to four independent directors other than family members and as such it is wrong to say that respondents Nos. 2 and 3 are conducting the affairs of the company by themselves. He also submitted that the petitioner is a habitual litigant and he does not enjoy the support of even the family shareholders. According to him, even though the first petitioner has expired, the petitioner has not been able to join the former's legal heirs as they do not support the petitioner. The second petitioner attended the last annual general meeting held on September 30, 1998, and voted in favour of all resolutions. The third petitioner withdr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ebruary 20, 1993. On the same day, another notice was purportedly issued for another board meeting convened on February 27, 1993. There is nothing to indicate in the second notice as to whether it was preponement of the meeting to be held on March 3, 1993, or an additional meeting. Since most of the items of the agenda for both the meetings were similar, there must have been a motive for issuing the two notices. In the first petition which was later withdrawn, the petitioners had averred that in the board meeting held on March 3, 1993, the petitioner had questioned the closure of parcel offices and, therefore, to rebut this averment, it has been shown as if no meeting was held on March 3, 1993, other than the one on February 27, 1993. Annexure R2 which is purportedly a letter from the petitioner seeking for leave of absence for the meeting to be held on. February 22, 1993, is a fabricated one. Even though the petitioner admits his signature on this letter, the letter as such was not signed by him as he normally left signed papers with the company due to his pre-occupation otherwise. In fact, the petitioner never received the notice for convening the board meeting on February 27, 19 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cision which cannot be questioned in a petition under Section 397/398. Our findings : The allegation relating to the closure of the parcel offices is two fold. One is that without the approval of the board, the second respondent closed the parcel offices and that there have been manipulations in the recording of minutes of the board meeting in which the decision to close the parcel offices was ratified. The second is that the purpose of closing the parcel offices was to release the lorries with a view to make money out of the proceeds of the sale of these lorries. There are minutes of a board meeting on August 7, 1992, which according to the company was attended by the petitioner, indicating that approval was given for closure of parcel offices and for delegating the authority to decide closure of parcel offices to the managing director, viz., the second respondent. Even though the minutes do not reflect the details or the number of offices, according to the counsel for company, closure of 57 parcel offices was ratified. We find that the last of the 57 offices was closed on August 3, 1998, and the board meeting was reportedly held on August 7, 1992. The petitioner doubts the veraci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing held on March 3, 1993, that, in this meeting the board had approved the closure of 18 offices, the names of which have also been indicated in the minutes. Thus, in view of the minutes of the board meeting dated August 7, 1992, having been confirmed in a meeting held on September 29, 1992, in which the petitioner was present and that the minutes of the meeting held on February 27, 1993, having been confirmed in the board meeting held subsequently which was also attended by the petitioner, we are not in a position to doubt the factum of holding of these meetings. As rightly pointed out by the counsel for the respondents, the decision to close the parcel offices is a matter within the competence of the management/ board and as long as the majority of the board approves such closure, an individual director cannot question the wisdom of the board. As far as the petitioner's contention that these offices were closed only with a view to release lorries for disposal by which the second and third respondents could get undue monetary benefits, we are not in a position to uphold this contention inasmuch as, as we have already held closure of the parcel offices is within the competence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e released, he sold the same for ₹ 1 lakh, the lorries at much higher price than what had been indicated. He also referred to certain affidavits obtained by the petitioner in this connection wherein the deponents have averred that they purchased the lorries at a much higher price than what is noted in the auction slips. Therefore, in the process of allegedly auctioning the lorries, the second respondent has derived huge undue benefits at the cost of the company and as such he should be directed to account for the same. 11. Shri Raghavan : The original allegation of the petitioner was that the company had sold the lorries at a throwaway price and now the allegation is that undisclosed amounts have been pocketed by the second respondent. For a long period of time, when the petitioner was a director of the company, the same procedure for disposal of unserviceable lorries was being followed and in the earlier occasions the petitioner himself had signed the transfer papers for lorries sold in similar auctions. He also submitted that after the Company Law Board passed an order on April 21, 1994, directing the company that vehicles should be sold only with the approval of the boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 20,000 and ₹ 1,27,000 respectively as is evident from the documents attached with the affidavits. These affidavits are all dated March 23, 1994, but were filed along with the rejoinder dated September 19, 1994. The respondents in turn filed affidavits from the very same persons : Adigarla Raghava has stated in her affidavit denying the earlier affidavit stating that the said affidavit was a manipulation and that she did not know English and that she had not signed the said affidavit. She has also averred that she paid only ₹ 30,000 and the loan she took was for the purpose of repairing the lorry to put it in a running condition. Shri Desetti Narayanarao has also denied to have signed the earlier affidavit and he has affirmed that he paid only ₹ 29,000 for the lorry and that the loan taken by him was only for getting the vehicle repaired. J. V. Raghavulu has also denied to have signed the earlier affidavit and he has affirmed that he paid only ₹ 18,000 for the lorry purchased. Whatever may be the suspicion of the petitioners in regard to this allegation of pocketing the difference between the actual sale amount and what is shown in the auction slips, there sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it of diversion of company's funds by way of payment of exorbitant commission with kickback arrangements. In a raid conducted in 1988, by the Income-tax Department it was noticed by them that certain firms in the benami names of these respondents had been paid substantial commission and as such all these expenditures were disallowed. Subsequently, these firms were dissolved and through benami arrangement, the respondents have floated two companies, namely, Hastina Auto Dealers Private Limited in New Delhi, and one Veekay Automotive Private Limited at Madras and appointed them as sole selling agents for auto products of the company on commission basis. These two companies were paid a commission of ₹ 84 lakhs during 1992-93. The managing director of Hastina is an ex-employee of the company and the son-in-law of the administrative manager of the company--Shri Krishnamurthy, who had signed the auction slips in respect of sale of lorries. In the same way, the managing director of Veekay is an ex-employee of the company. The share capital of these two companies is very meagre and it is inconceivable that they would earn a commission of ₹ 84 lakhs in one year. It is obviou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... han expressing an unfounded allegation, the petitioners have not furnished any evidence that the commission paid to these two companies has been received as kickback by the second and third respondents. In regard to the allegation that some of the persons shown to have applied for the dealership have not actually applied, Shri Raghavan referred to the affidavit filed in February, 1999, by the respondents enclosing therewith the applications actually received from these persons at the time when the advertisements were released. Therefore, Shri Raghavan submitted that mere allegations are not enough but have to be established which the petitioners have failed to do. 15. Our findings : This allegation relates to selection of Veekay Automotives Pvt. Ltd., and Hastina Auto Dealers Pvt. Ltd., as the authorised dealers for the products of the company, that they are benamis of the second respondent. The petitioners have also questioned the authenticity of the reports of the private consultants. The company has not denied that Shri Vijay Kumar of Veekay was earlier an employee of the company or that the promoters of Hastina are related to an employee of the company. It is also admitted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , have filed copies of the original letters of application in their letter heads by these persons/entities. We also find that none of the letters produced by the petitioner is on any letter head and that these letters are dated sometimes in August, 1994, but were filed only in December, 1998. According to the petitioner, he had sent prepaid inland letters to these persons and they have sent their reply in those letters and as such there are no letter heads and that these letters were originally to be enclosed with the petition but due to misplacement of the same by the advocates, they were filed later. From the contemporaneous records, like advertisement, reports of the private consultants and the minutes of the board meetings, which all have been referred to earlier, we are of the view that we cannot find fault with the selection of these two entities as dealers for the company. We also note that the petitioner was a director for nearly three years after these appointments, and he does not seem to have raised this issue in any board meeting during this period, giving us an impression that he had no grievances in this regard till the same was raised in this petition. In regard to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Section 188 of the Act were also not followed. Further the notices for the meeting did not contain any explanatory statement as envisaged under Section 173 of the Act. Referring to B. G. Somayaji v. Karnataka Bank Ltd. [1995] 83 Comp Cas 649 ; [1995] 3 CLJ 334 (Kar), he submitted that explanatory statement is a must. Therefore, the removal of the petitioner as a director should be declared as null and void. 18. Shri Raghavan ; The removal of the petitioner as director was in full compliance with the provisions of law. When a requisition to remove the petitioner as a director was received by the company on November 5, 1993, before the matter could be considered in a board meeting convened on November 18, 1993, the petitioner obtained an order of injunction from a civil court. Later, when this order was vacated, in a board meeting held on December 27, 1993, it was decided to convene an extraordinary general meeting on January 21, 1994. Since the petitioner did not attend this board meeting and had sent a telegraphic representation, along with the notice, copies of this representation was circulated to all the members. Against this notice of the extraordinary general meeting, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equires special notice for removal of a director and it also stipulates that any representation made by the director must be circulated to the members. As far as the circulation is concerned, circulation is possible only if the director makes a representation in writing. In this case, the petitioner has not complained that he made a representation and that the same was not circulated. As a matter of fact the company had circulated the telegraphic representation received from the petitioner. Therefore, there is no violation of Section 284 as far as circulation of the representation is concerned. In regard to special notice, the complaint is that in terms of Section 190, after the board convened the extraordinary general meeting, the requisition is its must have issued a special notice 14 days before the date of the meeting, which had not been done. We are unable to support this proposition, Section 169 has to be read independent of Section 284. Once a notice under Section 169 is received by the company, it is bound to convene an extraordinary general meeting failing which the requisitionists themselves are entitled to convene the extraordinary general meeting. Since the notice itsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e with the existing resources of the company. In this connection, he referred to Mrs. Farhat Sheikh v. Esemen Metalo Chemicals P. Ltd. [1995] 1 Comp LJ 158 ; [1996] 87 Comp Cas 290 wherein the Company Law Board held that the directors cannot use their powers to issue further shares except in the interest of the company. In Standard Industries Ltd. v. Mafatlal Services Ltd. [1992] 2 CLJ 113 ; [1994] 80 Comp Cas 764 (CLB) the Company Law Board has held that rights issue in a closely held company can be oppressive to the members. Reference was also made to Hemant D. Vakil v. RDI Print and Publishing Pvt. Ltd. [1992] 2 CLJ 113 (CLB) ; [1995] 84 Comp Cas 838 in this regard. The company mobilised about ₹ 1.48 crores out of this issue but no modernisation or expansion had taken place thereafter and there has been only a marginal increase in production in the subsequent years. Since the company had a reserve of about ₹ 12 crores, the company could have issued bonus shares to improve its debt equity ratio instead of issuing rights shares. It was done only with a view to oppress minority shareholders. Further, even though the petitioner deposited the requisite amount for his righ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt of shares pursuant to the decision to issue further shares more or less on the same grounds that have been advanced now. We declined to grant the prayer except stipulating that the unsubscribed shares would have to be allotted in the same manner in which it was made during the earlier issue of shares in 1990-91. The allegation in this regard is two fold--one is that the purpose of issue was to reduce the petitioners to below ten per cent. and the other is that the company was not in need of funds. As far as the first ground is concerned, it is beyond our comprehension as to how a rights issue, as long as the offer is accepted, could reduce one's shareholding. Such an eventuality would arise only in case of a preferential allotment in exclusion of some shareholders. We also find that it is not the first time that the company made a rights issue. On an earlier occasion in 1991, such an issue was made. Therefore, we cannot subscribe to the view of the petitioners that the rights issue was made with an oblique motive especially when it will have effect on nearly 90 per cent. of the shareholders other than the petitioners who hold only around 10.6 per cent. shares. Shri Choudhrar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erences should not come in the way of discharging statutory responsibilities. The delayed allotment has denied the petitioner the benefit of dividend declared. Therefore, we are of the view that the petitioner should be compensated at least to the extent of the dividend that he would have been otherwise entitled to if the shares had been allotted in time. Accordingly, we direct the company to compensate him by payment of interest at the same rate at which dividends were declared and paid in respect of the delayed period within a period of one month from the date of receipt of this order. 23. Donation to a non-existent trust: Shri Choudhary : In the year 1995-96, the company gave a donation of ₹ 10 lakhs to one Srinivas Charity Trust in which the second respondent and his family members were the trustees. This trust was wound up as per the resolution of the trust dated May 30, 1992. In the guise of giving a donation to a non-existent trust, respondents Nos. 2 and 3 have diverted this amount for their personal benefits. Since the respondents have not filed the original minutes book of the trust, its bank accounts, pass books, etc., adverse inference should be drawn that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hary: The annual report of the company for the year 1994-95, shows a substantial gap between the opening stock plus production minus closing stock and sales worth crores of rupees was diverted by the second and third respondents for their own benefits. The company manufactures king pins, shaken bolts, C and B, F shafts and tubes, king pins bearings, trust washers, cotton pins, king pin bushes, wheel bolts, water pump shafts and other miscellaneous items. All those items are put together in one item. The licensed capacity of this item for 1995-96, is 34 lakhs. Installed capacity is 36 lakhs. For the year 1995-96, the production under this head was stated to be 39,22,383 units. Sales were shown as 5,72,499 units. There is a variation of 33,63,576 numbers under this head. This was for the year 1995-96. For the same item, for the year 1994-95, the difference is 19,50,193 numbers. The value of this difference runs into crores of rupees. For this the respondent-company in its counter-affidavit admitted this discrepancy, but stated that the difference in variation represents sale of other items and the same is reflected in the money value of the sales. However, neither in the counter-af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r a number of years and the misappropriation runs into crores of rupees. Only an investigation into this matter would bring out the correct position. 27. Shri Raghavan : The company has filed a detailed counter pointing out that there is no discrepancy and only an incomplete narration of the items under these heads. The company manufactures over 400 items of automobile spares. This is borne out by the price list produced before this Hon'ble Bench in the interim application. Since engine parts and chassis parts were subject to different rates of excise duty, there is a broad classification, which has now ceased to be relevant, since there is no such differential rates in excise duty. It is the deficiency or incomplete narration which is explained in the counter and in order to clear any doubts the respondents have placed before the Bench (a) complete day-wise details of production of all the 400 items as reflected in the RG-1 registers maintained under the Central Excise Act and periodically verified and signed by the authorities. These registers were made available at the hearing of the interim application and also at the hearing of the main company petition. The said regist ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that there is any suppression of closing stock. Since the position is so clear, the question of any investigation in this matter does not arise. 28. Our findings : This allegation was not in the original petition but was later raised in C. A. No. 65 of 1996. In the order dated December 18, 1997, we have covered this allegation expressing our prima facie opinion that the petitioner had not made out a case establishing that there has been diversion of stock from the factory without being accounted for in the books of account. However, we also indicated in that order that we did not propose to give any finding on this allegation at that point of time since the company had agreed to give full details of the production, sales and closing stock together with a statement of reconciliation. The company has furnished, as pointed out by Shri Raghavan, a compilation indicating therein invoice-wise sales and the sale value for the year 1994-95, and also gave a consolidated statement reconciling opening stock, production, sales and closing stock for the year 1994-95, to indicate that the figures as shown in the balance-sheet were correct and that the apprehension of the petitioner that ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the year 1975. However, the shares were not transmitted in the name of the legal heirs. Later, with mala fide intention, the company recognised one K. V. Ramesh, the son of the deceased as the shareholder even though the deceased had two other daughters. Afterwards, the shares were transferred to another shareholder Smt. Anapurna along with two others. The husband of the deceased filed a petition for declaration that he and his children were the nearest legal heirs and as such shares should be transmitted in their names. Only with the order of the court, could he get the shares registered in his favour. Shri Choudhary also alleged that respondents Nos. 2 and 3 have been siphoning off the company funds/incurring wasteful expenditure. According to him, the golden jubilee celebration of the company was spread over two years by incurring more than ₹ 65 lakhs. The celebrations could have been curtailed to one year and instead of spending such a huge expenditure, the same could have been distributed as dividend to the shareholders. The entire exercise in this regard, he submitted was only to strengthen the position of respondents Nos. 2 and 3. He further submitted that there are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 3(1)(iii) of the Act. In 1993-94, of the 62 members, 11 were employees and Smt. Soma Lakshmi, had expired, Excluding them, the number of members was 50. The legal heirs of the deceased lodged duly executed transfer forms to transfer 1,260 shares in favour of Smt. Anapurna and later on by fresh transfer deeds, these shares were transferred in the joint name of herself, Shri Ramesh and two others and this transfer was approved in a board meeting held on January 29, 1994, much before the first petition was filed. As far as the application of Dr. Subbarao was concerned, the company could not comply with his request as it would take the number of members beyond 50. Shri Subbarao filed a petition before the Company Law Board in 1978, which was dismissed by the Company Law Board. He further submitted that when the legal heirs have not chosen to complain, this matter cannot be agitated by the petitioners in this petition. It is a fact that the company spent about ₹ 65 lakhs in connection with the Golden Jubilee Celebrations. The expenditure was mainly upon goodwill payment made to the staff and release of advertisement, etc. Of the ₹ 65 lakhs, ₹ 30 lakhs were paid as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t is an incorporated company. The petitioner is not pursuing the matter for his own benefit or because of the estrangement in the relationship with these respondents. He is interested in the wejfare of the company and all the shareholders. The material placed in the petition as well as in various applications would clearly indicate that all is not well with the company. Even though the petitioner could obtain various affidavits to substantiate the allegations in the petition as referred to by him earlier, yet, all the deponents of the affidavits have later retracted due to threat and intimidation by the second and third respondents. Therefore, he submitted that an independent investigation into the affairs of the company would substantiate the allegations made in the petition. He also submitted that even assuming that the various reliefs sought for by the petitioners could not be granted, yet, the Company Law Board is not powerless to grant appropriate equitable relief. For this proposition, he relied on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas 743 ; [1982] 1 CLJ 1 (SC). 33. Concluding his arguments, Shri Raghavan, stated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been rewarded with higher rate of dividend and that more than the majority of the shareholders support the present management. Further from the findings that we have given on each of the allegations, it is apparently clear that the petitioners have not been able to establish any of the allegations meriting the grant of any of the prayers in the petition. As far as the prayer stressed by Shri Choudhary that an investigation into the affairs of the company would establish the allegations, we would like to go by the decision of the Calcutta High Court in Mohta Bros. (P.) Ltd. v. Calcutta Landing and Shipping Co. Ltd. [1970] 40 Comp Gas 119 as cited by Shri Raghavan as we have seen that while some of the allegations have arisen out of apprehension and suspicion, others have not been established. However, it is not that, when allegations are not established in a Section 397/398 petition, that, such a petition has to be dismissed. As pointed out by Shri Choudhary, relying on Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd. [1981] 51 Comp Cas.743 (SC), considering the facts and circumstances of a case, the Company Law Board is competent to pass appropriate or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pital may be effected by authority of this order. To give effect to our directions, it is necessary that the shares of the company are valued by an independent chartered accountant. For valuation of shares, it is necessary to prescribe the date of valuation. Normally, the date of valuation is fixed as the date of the petition. In this case, in the normal course the date of valuation should be the date of the immediate last balance-sheet after filing of the petition, i.e., March 31, 1994. However, in this case, the same may not be appropriate for the reason that additional shares were issued in the last quarter of 1993-94, which will have impact on the share value, which will not be fair to the petitioners especially when shares were allotted to the petitioner only in 1997, even though he remitted the money in 1994. Thus ; in the facts of this case, we stipulate that the valuation will be based on the balance-sheet as on March 31, 1998. For the purpose of valuation, the company may approach either S. Gopalakrishnan, Lovelock and Lewies, Chartered Accountants (Hyderabad Telephone No. 3301365) or Shri Shanti Lal Daga of S. Daga and Co., Chartered Accountants, Hyderabad (Telephone No. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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