TMI Blog1995 (8) TMI 331X X X X Extracts X X X X X X X X Extracts X X X X ..... the same, both the petitions, with the consent of the parties, were heard together and are also being disposed of by this common order. In the case of C. P. No. 2 of 1994, more than one person has joined to file a single petition. Subsequently, on December 27, 1993, an application was filed by the legal heir of one of the petitioners in C. P. No. 2 of 1994, viz., Shri Harish Chandra Baranwal, seeking for substituting his name due, to the death of the petitioner on September 28, 1993. The respondents in C. P. No. 2 besides the company include Shri Arvind Mahajan, Shri D, C. Mahajan and Shri Ajay Mahajan, who are all directors of the company. These persons are also respondents in C. P. No. 9 as well. In addition in C. P. No. 2, Smt. Shukla Mahajan, who is the petitioner in C. P. No. 9, was also impleaded as a respondent though no relief is sought against her. The additional respondents in C. P. No. 9 include Smt. Rashmi Mahajan, wife of respondent No. 3, and also includes two more organisations, namely, Sidhartha Textiles Mills Ltd. and Sidhartha Textile Agencies, a partnership firm. 2. The background of the dispute is that the two groups, as stated in the petition, namely, the Mr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... involved in the company's work, started participating in the company's affairs. At this time, SM did not suspect any attempt on their part to control the company. However, the contesting respondents evolved a clandestine scheme to refuse issue of share certificates to the SM group to the extent of ₹ 11.70 lakhs and usurped the respondent company for their personal gain and advantage. The share certificates in respect of ₹ 4.9 lakhs were denied to the nine persons who are petitioners in C. P. No. 2 on the ground that the money was not contributed by them and the money belonged to SM's husband and also alleged that this fact was concealed intentionally. Similarly, no allotment was made against the contribution of ₹ 6.8 lakhs by SM also on account of this. Thus, respondents Nos. 1 to 4 illegally denied the rights of the petitioners in respect of their promoters' contribution of ₹ 11,7 lakhs. In perpetuation of these illegal designs letters were sent to the petitioners in, C. P. No. 2 to claim their money back within a time limit in case it belonged to them. 4. The petition also contains details of the drafts sent by the petitioners in 1989, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at (a) the name of any person is without sufficient cause entered in the register of members, or (b) after having been entered, is without sufficient cause omitted therefrom. Thus, no cause of action arises as it is an admitted fact that the petitioners had never been admitted as members. The second objection is that under the Act, the petition is hopelessly barred by time. Even under the residuary Article of the Limitation Act, with reference to the date of deposit of the money, the petition is barred by limitation for a civil suit. Thirdly, the petitioners have advanced money by way of deposit for allotment of shares but they cannot enforce allotment as no application has ever been filed for share allotment. As such, the remedy, if at all, does not lie before the Company Law Board. Fourthly, the case is also hit by the Benami Transactions (Prohibition) Act, 1988, and it is illegal as money deposited by different parties has been wrongly reflected in the company as the contribution of SM. In support of this, the reply states that SM, in connivance with her husband, has filed documents with the Department of Income-tax showing as if the money has been paid out of personal savings o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be inducted. 8. It was denied that there was any effort to exclude any person but whosoever acted against the interest of the company was not retained in the affairs of the company. The respondents have also denied the allegation of non-involvement and stated that they were involved in getting the project cleared from competent authorities and in getting the requisite certificates from certain authorities at Bombay and, thereafter, were involved in placing orders for machinery and getting them installed at Panchkula. There was no group in the company but/it was Shri Yashpal Mahajan who wanted to have a leverage and to step into the company The respondents have also denied that the project was promoted on the involvement of SM. On the other hand, it is stated that she did not have the authority even to file an application for electricity connection. The contention that the IFCI has financed the project because of SM has been denied and, on the other hand, the project was examined for viability and then approved. 9. It is further stated that the entire project was carried out under the stewardship of AM with the support of the Reliance group and in fact Reliance appointed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d was reflected under the head promoters' contribution pending allotment, after acceptance and allotment of shares in January, 1993, the amount of ₹ 11.70 lakhs is being reflected as current liability and despite communication dated June 2, 1993, none of the persons has come forward to collect the money back. 12. As regards the papers available in the Income-tax Department, it is stated that it was the result of a misrepresentation by a chartered accountant who was looking after the affairs of Shri Yashpal Mahajan and Shri Yashpal Mahajan had obtained the signatures on blank paper from AM. This, however, has been misused by SM and her husband. By this, process, the couple only tried to prove that the investment of the nine persons was to the knowledge of AM. This is a criminal act on their part. 13. In conclusion, the respondents have prayed for dismissal of the petition with costs. 14. During the hearing of the case, Shri J. S. Narang, advocate, submitted on behalf of the respondent company, that in the case of C. P. No. 2 of 1994, a joint petition has been filed by nine petitioners. Such a petition is not maintainable under Regulation 14(4)(b) of the Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... each petitioner has got his own claim and the claims are not interlinked. Regarding the limitation question, it was contended that when the company has not made any allotment including for the respondents, no cause of action arose till such time. The allotment to the respondents was done in January, 1993, and as such if at all, the limitation should apply from that date. As regards the discrepancy in dates between the petition and the affidavits, as a counsel he himself confirmed by his own signature that the petition was filed on September 6, 1993, and the objections are mere technicalities. As regards averments regarding source of information he stated that the petition itself makes clear the source in each para and hence it is immaterial if it is not disclosed separately. The parties were informed that we in the Company Law Board decide on the preliminary objections along with the main petition. 17. Shri M. G. Ramachandran, while moving the petition, submitted that what is required to be shown by the petitioners for the purpose of Section 111(4) is a prima facie evidence of membership from the records of the company. In this connection, he cited the judgment of the Karnataka ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been acknowledged in the directors' report and the same has been established from the balance-sheets for 1991 and 1992. The balance-sheets for some of these years also indicate by name the amount contributed by the petitioners as part of the promoters' contribution by a separate unsigned statement. Attention was also drawn to page 127 of the first petition wherein there is a statement relating to ₹ 4.9 lakhs contributed by the various petitioners in the first petition. It has also been verified by the Deputy Commissioner of Income-tax, Solan, Himachal Pradesh. Attention was also drawn to page 138 of the first petition which contains a statement forming part of the balance-sheet of the company for the year, 1991 -92. This contains complete details of all moneys received from the promoters towards equity capital. Attention was also drawn to page 114 onwards till page 123 of the second petition which contains the covering letter addressed to the Income-tax Department from the company signed by AM along with the reference numbers of the demand drafts. All these documents are attested by the Deputy Commissioner of Income-tax, Solan, Himachal Pradesh. With regard to the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dvanced on behalf of the respondents by Dr. A. M. Singhvi, senior advocate. Shri Singhvi conceded that money received from various places by DD was credited in the share application account on different dates during 1989. However, the petitioners have chosen to remain silent till 1993, even after the removal of SM as a director in december,1992. Shares were allotted to the respondents in January, 1993, and letters were written in May-June, 1993, to SM and others about the money lying unclaimed by them. According to Dr. Singhvi, the relevant issues are : (a) whether the Company Law Board has jurisdiction in the facts and circumstances of the case ; (b) whether the petition is barred by limitation ; and (c) the scope of adjudication under Section 111. As regards the first issue, it was the contention of learned counsel that the Company Law Board has no jurisdiction at the pre-allotment stage. According to him, without a pre-existing legal right the cause of action arises only after a person becomes a member or shareholder. Based on the present facts, there cannot be a petition under section 111 or even under Section 397 before the Company Law Board. The present petition cannot also b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r shares. Reacting to the arguments on possible complicated questions, learned counsel said that the fact of acceptance of the contribution and the company having taken advantage of the money for its project are admitted facts and there is no complexity involved. As regards limitation, he contended that the cause of action arises on the date of allotment. The right to sue has accrued only on the failure of the company to make allotment. In this connection, he cited Rukhmabai v. Lala Laxminarayan , AIR 1960 SC 335, para 33. He also referred to B. B. Mitra on Limitation, page 1712, where it is stated that when a record is to be corrected, the limitation runs from the date of the wrong entry. 24. After perusing the pleadings and hearing the arguments on behalf of the parties, the following five issues emerge for our consideration : (i) whether the petition is maintainable keeping in view of the Company Law Board Regulations, 1991, and the law regarding limitation ; (ii) whether it is a pre-requisite that one has to be a member to file a petition under Section 111(4) ; (iii) whether the Company Law Board has jurisdiction to decide on matters relating to allotment/non- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the regulations. Keeping in view the reasons adduced and the delay being a couple of months, we only consider it appropriate to permit substitution of the legal representatives in exercise of the power vested in us as the objection is purely technical. 27. The next objection relates to the defect in the affidavits in both the petitions that they have not been drawn in the prescribed form and that there has been a discrepancy in the dates. Against this, we accept the contention of learned counsel for the petitioner that the source of information though not disclosed in the affidavits is available in the relevant paragraphs. As regards the dates, counsel himself has assumed full responsibility and has also signed the petition. In view of these we consider the above objections as mere technicalities and as a tribunal we do not propose to be strictly formal in these matters particularly when these questions do not go to the root of the subject-matter under consideration. 28. The next major objection is with regard to limitation. This objection was raised on behalf of the respondents by Dr. A. M. Singhvi, senior advocate, who stated that under the residuary Article 137 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Limitation Act is applicable to these proceedings, the period of limitation has not yet expired. 29. We are, however, on a more fundamental issue with regard to the very applicability of the Limitation Act, to the proceedings before the Company Law Board. We had occasion to deal with this matter at great length very recently in A. V. Sampat, Official Liquidator v. Dunlop India Ltd. [1996] 87 Comp Cas 398 (CLB). In this case, we have relied on certain decisions of the Supreme Court in the context of the applicability of the Limitation Act, namely, Nityanand M. Joshi v. Life Insurance Corporation of India , AIR 1970 SC 209 and Town Municipal Council, Athani v. Presiding Officer, Labour Court, AIR 1969 SC 1335, and came to the conclusion that the Company Law Board is not a court for the purpose of the Limitation Act and as such the limitation under Article 137 of the Limitation Act, 1963, does not apply to the proceedings before us. Accordingly, we hold that the petition is not hit by the limitation prescribed under the Limitation Act, 19 3. 30. Dr. A. M. Singhvi also argued that the petition is further hit by the time limits prescribed in Section 111(2) of the Act. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Section is untenable. A similar view has been expressed by the Kerala High Court in Joseph Michael v. Travancore Rubber and Tea Co. Ltd. [1989] 66 Comp Cas 491 , wherein it is stated that a person claiming title to shares can ask for rectification of the register even if he is not a member. 32. The requirement of an agreement in writing to become a member has also been considered in Ram Kishan v. Kanwar Papers P. Ltd. [1990] 69 Comp Cas 209 (HP) and this requirement was dispensed with. It was held that this definition is for the benefit of the shareholder and can be waived when he himself seeks membership. 33. Counsel for the petitioners has rightly relied on the Division Bench judgment of the Karnataka High Court in Shri Balaji Textile Mills (P.) Ltd. v. Ashok Kavle [1989] 66 Comp Cas 654 to the effect that the word member has to be understood in the context in which it is used. In that case, the court has specifically ruled out Section 41(2) in construing the meaning of the word member in Section 399 of the Act. It was further held that if a company by its own conduct had treated the parties as shareholders and if it is prima facie established from the docume ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re-requisite for a petition under Section 111(4) is not tenable. We hold accordingly. 35. The next major preliminary objection is with regard to jurisdiction on which we should be absolutely clear. The essence of the argument of the respondents on this score is that matters relating to allotment of shares or matters prior to the allotment cannot be the subject-matter of a petition under Section 111(4). Dr. A. M. Singhvi, learned counsel for the respondents, stated that without a pre-existing legal right, no cause of action can arise. He cited the Supreme Court decision in Morgan Stanley's case [1994] 81 Comp Cas 318 ; AIR 1994 SC 225, to state that the shares themselves not having come into existence, the claim of the petitioners cannot sustain. The arguments of the respondents are based on the normal perception that there should be a subsisting legal right and generally in the case of an application for shares, the allotment or refusal to allot is at the discretion of the board of directors and no one can claim it as a matter of right. No applicant can raise a dispute under Section 111(4) of the Act for non-allotment. This objection on the part of the respondents is well ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appropriate to cite in this connection a decision of the Gujarat High Court in Shri Gulabrai Kalidas Naik v. Shri Laxmidas Lallubhai Patel of Baroda [1978] 48 Comp Cas 438 in which the court has stated that the jurisdiction which enables the court in an application under Section 155 to examine all questions, complex, intricate or otherwise relating to title to the shares, further enlarges the jurisdiction of the court set up under the Companies Act to decide all those questions which the court considers necessary or expedient to decide in connection with an application for rectification. The Supreme Court has decided this issue much earlier in 1965 in Public Passenger Services Ltd, v. M. A Khadar [1966] 36 Comp Cas 1 (SC) in which the issue related to a notice for forfeiture of shares and the court observed that such matters could be examined in proceedings under Section 155. A similar forfeiture issue was also decided by the Rajasthan High Court under Section 155 in Kotah Transport Ltd. v. State of Rajasthan [1967] 37 Comp Cas 288 . Coming to the specific question of allotment/non-allotment of shares, these issues were also decided under Section 155 by the Calcutta High Court ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... credence to this question at all. However, on a deeper examination we do appreciate the distinction between the jurisdiction conferred by law and the exercise of discretion for not using such jurisdiction in a particular situation. As such both the issues can co-exist, namely, whether a jurisdiction is available and whether in a particular situation discretion could be exercised for not using the jurisdiction. What Dr, Singhvi emphasises is that even if jurisdiction to enquire into matters of allotment is available we may not use that jurisdiction and exercise our discretion to relegate the parties to the civil court. Though we are clear in our minds regarding the availability of jurisdiction to enquire into matters relating to allotment, yet we may in particular circumstances depending upon the facts of a case, refrain from exercising the jurisdiction available. We have also referred to the various precedents in this regard. 38. A single member Bench of the Delhi High Court in Harnam Singh v. Bhagwan Singh [1992] 74 Comp Cas 726 has expressed the view that the jurisdiction of the company court dealing with a case under Section 155 is co-extensive with that of a civil court an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se they are strangers. The case of the respondents is that the company is a private company consisting of only blood relations and that there was an understanding that no outsider shall be inducted. This is buttressed by the fact that the promoters' contribution of ₹ 11,70,000 from the respondents have all come from either the family members or their group companies/firms. In our view, there is substance in this contention in view of various decided cases. Where the company is in the nature of a partnership it would be unfair to introduce any partners without the consent of the other persons. However, in the present case, there is nothing in writing produced before us to evidence this kind of an understanding. At the same time the circumstances show that the business was purely confined to blood relations. Giving weightage to circumstantial evidence is imperative--for example a 50 : 50 ratio is not anywhere on record but the actual contribution is on 50 : 50 basis. Similarly keeping the company within the family fold may not be on record but the conduct of the respondents shows that they have kept their contribution within the family. Hence, it is necessary to ascertain w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut even the concerned chartered accountant being a party before us, whether these documents were genuine and emanated from the company with the knowledge of the respondents. Though knowledge of the respondents that the nine petitioners were the contributors to the promoters equity, was attributed based on a letter signed by AM as managing director of the company addressed to the Assistant Commissioner of Income-tax, Solan, it is the contention of the respondents that certain blank signatures were obtained from AM which have been misused by the husband of SM to file these statements before the income-tax authorities. The truth of the statements affirmed on oath could not be established unless a proper examination is conducted. In this connection it should be noted that with all allegations against SM's husband Shri Yashpal Mahajan, he himself is not a party before us. 42. It appears that the accountant of Swaraj Mazda had been dealing with the accounts of the company earlier and this is perhaps on account of the association of the husband of SM in the earlier stages of the project. The respondents contend that the root cause of dispute is the dubious role played by Shri Yashp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court. 45. We have so far considered the preliminary objections including the jurisdiction of the Company Law Board to entertain the petitions and whether there are any complicated questions of law and facts which warrant our non-intervention in the matter. We have come to the conclusion that C. P. No. 9 of 1994 relating to SM is maintainable and also that we may consider this petition with regard to the reliefs prayed for. We shall now examine the facts and circumstances in this case for considering relief as the legal issues have been considered in detail and settled. 46. It is an undisputed and accepted fact that an amount of ₹ 6.8 lakhs has been contributed on various dates from November 28, 1989, to February 27, 1990, and credited to SM's account. The only dispute raised by the respondents as regards SM's contribution is that she was asked for the source of her contribution but she was not able to provide such details but no evidence of any correspondence is available in this regard. 47. In our view, the promoters' contribution made by SM stands on a different footing than that made by the nine applicants in the other petition. SM is as per records ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se are incorporated in the agreement between the company and the IFCI. In view of these undisputed facts, SM's claim to be a shareholder of the company with contributions already made by her as a promoter is a valid claim. In fact such contribution was a pre-condition to the disbursement of the term loans from the IFCI to constitute a base for the entire project as per the covenants with the IFCI. This situation is not comparable to that of a general investor making an application to the company for allotment of shares and awaiting the decision of the directors for allot ment. The citation of the Supreme Court judgment in Morgan Stanley's case [1994] 81 Comp Cas 318 is in a different context altogether, i.e., the provisions of the Consumer Protection Act. For that purpose the pre requisite is that there should be goods . Since the shares have not come into existence a case under the Consumer Protection Act is not maintain able. That decision has no relevance to the present case. The plea that the directors have a discretion to allot or not to allot the shares to such person is not a valid argument in such a situation. We have already held in Dr. Jitendra Nath Saha v. Sh ..... 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