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2019 (5) TMI 1048

gs and General Meeting that are held without issuing notices to the Petitioner Directors - HELD THAT:- The affairs of the Company are not being conducted in accordance with law as the Petitioners are out of the Country and they are not permitted/given sufficient opportunity to be involved in the affairs of the Company. The contention of the Respondent that they were given due notices and they have participated in all the meetings is not born out of the record. It is true that the Petitioners were given notice for some of the meetings. However, the Respondent failed to substantiate their averments by producing substantial evidence except some emails, which has little evidentiary value. The 2nd Respondent has not given any suitable explanation as to why the Respondent No.2 was allotted shares at par without premium and allot shares to the Petitioners at premium except simply stating that it is a mistake and unintentional but no action was taken to rectify it so far. The Respondents are resorting to acts of oppression and mismanagement which are further to be investigated by the Registrar of Companies and Principal Director of Income Tax (Investigation) with whom the complaints are al .....

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ate Affairs. (6) To pass an order to appoint an Independent Auditor to investigate the dealings of the purchase of land and the amount received and spent by the Company and how it is booked in the accounts of the Company. (7) To pass an order that the allotment made to the contesting Respondents without premium is null and void and consequently direct the Company to reduce proportionately the numbers of shares allotted to them and rectify the Register of Members. (8) To pass an order declaring that the Board Meetings and General Meeting held without issuing notices to the Petitioner Directors are null and void and the decision taken on the said meetings will not bind the Petitioner Directors and other individual investors and shareholders, etc. 2. Brief facts of the case, as mentioned in the Company Petition, which are relevant to the issue in question, are as follows: (1) M/s. World Schools Private Limited (hereinafter referred to as Company) was incorporated as a private Company limited by shares on 24.01.2005 under the Companies Act, 1956 ('Act') in the State of Karnataka, and at present, the Registered Office of the Company is situated at New No.76, Old No. 29, 1st Main .....

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and 4 alone, were the shareholders of the Company and on 30.11.2006, 25000 Equity Shares of each allotted to the 4th Respondent, the 1st Petitioner, 3rd Respondent, 5th and 6th Respondent and the 2nd Petitioner at a premium of ₹ 50 per share. It is pointed out that till the EGM for the year 2006, the 2nd Respondent was holding 7500 shares and it was increased to 57,500 shares by an allotment of 50,000 Equity Shares of ₹ 10/- each without any premium and as on the date of holding the AGM for the year 2007, he was holding 57,500 Equity Shares in the paid-up of the Company. However, he was allotted said 50,000 shares without any premium, whereas the allotment of shares made at premium of ₹ 50/- per share to the other 5 investors of the R-1 Company wherein the 1st and 2nd Petitioner were also allotted shares with premium. The 3rd Petitioner has been allotted shares 12,269. It is stated that allotting shares to the R-2 without premium was not discussed in any of the Board Meeting and it was decided by the R-2 unilaterally, who is being the MD of the Company. The disparity in the allotment of shares to the R-2 is challenged in the Petition. (6) At present, there are 9 D .....

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t and in turn the shares are to be transferred to him. In the said email, he had also informed that many of the Board Members are considering the second option. It is not known who are the Directors considered the second option and according to the Petitioners, they must be none other than the contesting Respondents. And this email, which has been sent by the R-3 had invoked serious repercussion in the affairs of the Company and number of Directors had questioned the action of the Respondent Directors. The 1st Petitioner had also requested the R-3 to call for a special meeting of all the investors to discuss the matter, however, for the best reasons known to him the said meeting was never called. Though the said act on the part of Respondents had not been carried out further, it would show the intention of the Respondent Directors. (9) The Respondents never sent any reply to the most of the mails sent by the petitioners except with regard to the audit and its scope. The Respondents were not bothered about the investors and never thought fit to send reply to the mails of the investors. It is also stated that the R-2 purposefully treated the investment made by the 3rd Petitioner as i .....

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d to coordinate and provide us with the information was not aware of the transactions recorded in the books prior to 2012-13 and we were not provided with satisfactory explanation/information for the said years. d. There was no responsible person to provide complete and proper information with respect to the transactions entered into by the institution. It is stated that the audit was fixed with the consent of the contesting respondents and the above information provided by the Auditor would show that the contesting Respondents are not interested to divulge necessary information to the Auditor to finish the audit. This fact alone would show that the ulterior motive of the contesting Respondents. The Auditor in the report under the heading Sources of Funds and its utilisation had observed the following: e. Investors' funds comprising of monies received from existing and proposed shareholders towards equity shares allotted, share premium account, shares pending allotment unsecured loans. The monies received have been verified with the bank statements and the same is satisfactorily reflected in the books of account. However, the confirmation of total investment made by each invest .....

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ded. Though the said meeting was held in the year 2007, no proposal of appointing trust members was received from the contesting respondents, in the back of the Petitioners, the contesting Respondents have appointed themselves as Trust Members and they are managing the affairs of the Trust also. They have misappropriated the money in the Trust also which has been reported by the Auditor. Therefore, it is inevitable to appoint an interim committee to manage the affairs of the Trust also. (13) It is stated that the affairs of the Company and the Trust are being conducted in the manner prejudicial to the interest of the Shareholders and there will be likelihood of manufacturing or fabricating documents to suit the convenience of the contesting Respondents. They have not rendered any proper accounts during the audit leave alone proper accounts and they may fabricate accounts to show that everything has been done in accordance with law. Therefore, an investigation in the affairs of the Company is very much necessary to find out the truth in the affairs of the Company. The Company is running a school and continuation of management of the school in the hands of the contesting Respondents .....

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of shares be conducted by a Consultant appointed by the financial committee in addition to the financial review which was already being undertaken. Pursuant to the said legal notice, the review by V&K was also resumed. A sub-committee comprising of Petitioner Nos.1 and R-2 and 5 was formed to facilitate closure of this review. (4) It is stated that the present Petition has been filed as a reaction to Petitioners No.1 and 2's removal from the Board of the Company. Petitioner Nos.1 and 2 were removed from the Board of Directors through a Board Resolution dated 07.03.2016 in accordance with Section 167 of Companies Act, 2013 because they had failed to attend the meetings of the Board for over a year despite having been notified of the Board Meeting in advance on each occasion. They ceased to be Directors w.e.f. 07.03.2016. (5) It is contended that the instant Petition is barred by laches and limitation. The Petitioners are inter alia challenge allotment of shares in the Company, made in the years 2008 and 2011, after a period of 8 years and 5 years, respectively. It is asserted that Petitioners are well aware of the said allotments for several years now. In any event, all cla .....

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2016, even though the allegations made in the Petition relate to earlier years. (10) The Petitioners have suppressed material facts and made misleading statements in the Petition, and have not approached this Hon'ble Tribunal with clean hands. For example: a. Petitioner Nos. 1 and 2, in their capacity as Directors, were aware of the alleged illegal allotment of shares in 2008, as the same was placed, discussed and accepted by the Board of Directors. b. A financial committee was appointed by the Board, which included Petitioner No.1, to look into the queries raised in the unsigned, informal financial report prepared by V&K. This Committee prepared a reply to the various queries raised in the said report. The said reply was also placed before the Board of Directors at the meeting held on 24.03.2016 where Petitioners No.1 and 2 were present. Subsequently, the signed minutes of the meeting were circulated and Petitioners No.1 and 2 did not raise any objections regarding the financial review until date of this Petition. (11) It is stated that the Petitioners have not contributed towards the management of the Company or acted in the best interests of the Company. On the contrary, .....

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e any evidence to show that affairs of the Company are being conducted improperly. (14) The Petitioners have failed to provide any credible basis for seeking appointment of an interim management committee or for inspection of the affairs of the Company. In any event, this Hon'ble Tribunal does not have the power to order an inspection or investigation or appoint an interim management committee to manage the affairs of the Trust. 4. The Respondent No.6 has filed a reply dated 04.08.2017, by inter alia, contending as follows: (1) Respondent No.6 was one of the initial investors in World Schools Private Limited ('Company'). He was appointed as a Director of the Company on 05.08.2005. Respondent No.6 continued as a Director of the Company until he was removed from the Board at the meeting held on 07.03.2016 due to failure to attend Board Meetings for over a year, in accordance with the relevant statutory provisions. Since there were genuine reasons why R-6 had been unable to attend Board Meetings of the Company for over a year, R-6 explained these reasons to the Board of Directors and sought re-appointment as Director by assuring the Board that he would regularly attend Boa .....

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the minutes for which were also circulated to the Petitioners. Similarly, for the Board Meeting held on 04.08.2014, notice was provided to the Petitioners vide e-mail dated 27.07.2014 but the Petitioners declined to attend the said meeting. Subsequently, the minutes for the said meeting were circulated to the Petitioners. However, the Petitioners have now contended that they were not provided notice of the meeting and were not aware of the meeting. It is evident that the Petitioners' allegations in this regard are false. Not only was the notice for the meeting sent to all the Directors including the Petitioners but minutes were also circulated. (5) The Petitioners have also made a number of serious allegations, including allegations of fraud and fabrication against R-2 and certain other Directors of the Board, who are arrayed as Respondents in the present Petition. Such allegations have been made without providing the necessary particulars or producing any evidence to substantiate the same. (6) It is stated that Petitioners No.l and 2, despite being initial investors, have not come forward to help the Company in times of acute financial difficulties. It is further contended tha .....

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'mismanagement' are not defined in the Companies Act. Section 241(1)(a) deals with 'oppression'. Accordingly, oppression would mean if the affairs of the Company have been or are being conducted: a. In a manner prejudicial to the 'public interest', or b. In an manner prejudicial or 'oppressive' to him or any other member or members, or c. In a manner prejudicial to the interests of the Company. (3) The definition of the term 'oppression' is too wide and wide application. The meaning of these words for the purpose of Company Law should be used in a broad generic sense and not in any strict literal sense. It was held by the Apex Court in Shanti Prasad Jain v. Kalinga Tubes Ltd. [1965] 1 Comp. L.J. 193 at 204 as under: The essence of the matter seems to be that the conduct complained of should at the lowest, involve a visible departure from the standards of fair dealing, on which every shareholding who entrusts his money to the company is entitled to rely. (4) As per Sections 166 and 210 of the Companies Act, 1956, the AGM is to be held within 6 months from the closure of the Financial Year. Further, the Company had to be sent to the members of .....

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roving rests on the sender. In an instance, in an allegedly held Board Meeting at Bangalore on 24.03.2014, para 4 of the Minutes of the Meeting states no Board Meeting in person was held in India till 2016. Even the Board Meeting allegedly held on 24.03.2014, the Respondent claim that the same was held in Bangalore with the Petitioner 1 and 2 being present. On that day, the Petitioner No.2 never came to India and hence has not attended the meeting. (6) Due to the unauthorised acts of the Respondent Directors and fraudulent allocation of shares, misappropriation of cash and cash investments, etc., the Petitioner Nos. 1 and 2 requested for an independent audit. In a mail dated 26.04.2012 from R-3 to all the then Board Members, it was sought for 3-5 days independent audit from an external CA. In response, vide email dated 28.04.2012, Petitioner No.1 stated that 3-5 days would not suffice and required a comprehensive audit. This external audit was stalled by the Respondents citing that Company was not financially sound for almost one year. On 22.04.2013, the Petitioners sent a Legal Notice seeking for review of allotment of shares by the external Chartered Accountant (CA).The Responden .....

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34 Com Cases 510) d. K.M. Somaiah v. The Secretary, Govt. of Karnataka (2003) 56 CLA 263 (Bom.) 8. The Petitioners, together, are admittedly holding more than 10 % of equity shareholding in the Company. The Company being run by NRIs resident of US except Respondent Nos. 4 & 5, who are resident Bangalore and the fourth Respondent is mother of second Respondent. Out of 9 Directors of the Company, only Respondent Nos. 4 & 5 ae resident of Bangalore/India. As per law, all Directors of the Company are to be given due notice for conducing any Board meeting. However, evidence show that several Board meetings are conducted in US instead of at Bangalore. Though the Petitioner No. 1 & 2 and Respondent 6 are appointed as Directors on 5.08.2005, they were removed from the Directorship by Board Resolution dated 7.3.2016 as per section 16.7 of Companies Act, 2013. However, the Respondent No 6 was re-appointed as Directors during the Board Meeting held on June, 29, 2017 leaving the Petitioner No. 1 & 2 by showing discrimination between them. Admittedly, the first Petitioner and the sixth respondent hold substantially equal number of shares. When the Petitioners have invested thei .....

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rs are out of the Country and they are not permitted/given sufficient opportunity to be involved in the affairs of the Company. The contention of the Respondent that they were given due notices and they have participated in all the meetings is not born out of the record. It is true that the Petitioners were given notice for some of the meetings. However, the Respondent failed to substantiate their averments by producing substantial evidence except some emails, which has little evidentiary value. The 2nd Respondent has not given any suitable explanation as to why the Respondent No.2 was allotted shares at par without premium and allot shares to the Petitioners at premium except simply stating that it is a mistake and unintentional but no action was taken to rectify it so far. As stated supra, the Audit Report finds several financial irregularities which require further investigation by the Statutory Authorities. 12. The above facts and circumstances prima facie shows that the Respondents are resorting to acts of oppression and mismanagement which are further to be investigated by the Registrar of Companies and Principal Director of Income Tax (Investigation) with whom the complaints .....

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