TMI Blog2006 (10) TMI 506X X X X Extracts X X X X X X X X Extracts X X X X ..... nd rectify suitably the register of members of the Company; (iv) to declare all proceedings and resolutions passed at the meeting held on 28.10.2004 as void and inoperative and declare any further resolutions that may be passed either at board meeting or general meeting as void and inoperative; (v) to direct rectification of the register of members to include S. Kuppuswamy and T.B. Narayanaswamy as members of the first respondent company, holding one share each and by reducing the two shares from the total share . holding of the petitioner herein; (vi) to rectify the register of members protecting the petitioner from the effect of non-compliance with the requirement of Section 45. 2. Sri T.V. Padmanabhan, learned Counsel, while initiating his arguments submitted: * The Company was incorporated in May 1994 as a 100% subsidiary of the petitioner for the sole purpose of establishing, maintaining and conducting a golf course-cum-beach resort. The Company could not achieve its main object which resulted in the petitioner entering into an agreement with the second respondent on 19.07.2004 for the taking over the Company. The second respondent, in terms of the agreement, ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany. Fairfax group invested to the tune of 75 crores in M/s. Data Access India Limited (DAIL) 51% of which is held by the respondents 8 and 9, which are solely held by the second respondent. The respondents 2. to 4 are solely responsible in diversion of ₹ 25 crores during October 2004 out of the huge amounts received from Fairfax, to the Company by way of parking measure and not towards investment or advance share capital. The conversion of ₹ 25 crores into share capital of the Company is a deliberate manipulation, which resulted in attachment of the amount so brought into the Company, by the Income Tax Department for the dues and penalties payable by the Company. The Company's total tax liability for the period from 01.04.2004 to 07.01.2005 comes to ₹ 17.40 crores as borne out by the assessment order dated 23.02.2005. The assessment order describes the amount of twenty five crores of rupees in the Company's account as unexplained share capital. The assessment order produced by the petitioner is admissible in evidence, irrespective of the method by which it has been obtained as held in Pushpadevi M. Jatia v. Union of India and Ors. , There are no chance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hout convening any general meeting as envisaged under Section 81 of the Act and fulfilling the other requirements of the Act. There is absolutely no business need or commercial justification to raise the share capital from ₹ 27 crores to ₹ 53 crores. While issuing further shares, no offer was made to the petitioner, thereby the second respondent and his nominees abused their power to seriously prejudice the interest of the minority shareholders. This would constitute an act of oppression as observed by this Board in Deepak Luhia v. Kamrup Developers (P) Ltd. (Order dated 31.I2.2001 in C.P. No. 82 of 2000), wherein it has been held that any disproportionate allotment of shares is an act of oppression attracting the provisions of Section 397, * Form No. 5 dated 24.01.2005 filed with the Registrar of Companies shows that authorised capital was increased from ₹ 27 crores to ₹ 53 crores at the extra ordinary general meeting held on 28.10.2004. The petitioner never received any notice of the extra ordinary general meeting purportedly held on 28.10.2004 for increasing the share capital and for issue of further shares. Form No. 23 dated 24-01-2005 shows that the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... advantage of the company; and (b) directors are not entitled to use their power of issuing shares merely for the purpose of maintaining their control, or control of themselves and their friends, over the affairs of the company, or merely for the purpose of defeating the wishes of the existing majority shareholders; and (ii) Nanalal Zaver and Anr. v. Bombay Life Assurance Co, Ltd. to show that the directors hold a fiduciary position and must exercise their powers for the benefit of the company and for that alone but not for the personal ends of directors and for their personal aggrandisement, for keeping themselves in power. * The agreement dated 19.07.2004 envisages the sale of business and not the sale of shares. The sale consideration would include the price paid for the shares and the discharge of liabilities of the Company. The second respondent and his nominees, after taking over the Company, failed to discharge the huge liabilities, of the Company, for which claim has been made before the Arbitral Tribunal. The second respondent failed to relieve the petitioner from the guarantee obligations which resulted in many of the creditors of the Company proceeding against the pet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is wanted in connection with certain criminal cases filed in various parts of India. Similarly, the addresses of the respondents 3 4 furnished in Form No. 32 filed on 18.08.2004 are at variance with their addresses furnished in Form No. 32 filed on 24.01.2005, with the Registrar of Companies. The affairs of the Company are being conducted with the intention to defraud its creditors, members or any other persons. * At present, there are only six members in the Company including the petitioner, pursuant to the transfer of shares in favour of the second respondent and his nominees in terms of the agreement dated 19.07.2004 and therefore, the Company must be wound up. The second respondent by his communication dated 17.08.2004 requested the petitioner to transfer 2.43 crores shares in his favour and in favour of his nominees as described therein. Accordingly, 2,42,99,994 shares were transferred in favour of the seventh respondent in terms of the transfer deed forwarded by the second respondent, copy of which is produced before the Bench. The petitioner, after effecting the transfer of shares in favour of the seventh respondent as per the request of the second respondent forwarde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondents are taking contradictory stand at different point of time. The petitioner obtained various clearances for commissioning and running the golf course during the years 1999 to 2002, but the respondents failed so far to make any headway in commissioning the golf course. The second respondent has taken possession of the share certificates which were issued in the name of his nominees, apart from the fixed assets of the Company in the form of building, equipment, furniture and fixtures aggregating ₹ 6 crores, but failed to fulfill any of the obligations in terms of the agreement dated 19.07.2004. * The respondents 2 to 4 along with Gopinath Athappan were directors of DAIL against whom, summons have been issued by the Metropolitan Magistrates of Delhi, Kochi, Ambala, Lucknow, Chennai and Bangalore in criminal complaint filed by BSNL and prosecution launched by the Income Tax Department New Delhi for failure to deposit TDS. A complaint has also been lodged before the Enforcement Directorate for violation of the provisions of FEMA by the second respondent and his nominee directors in DAIL. The second respondent obtained anticipatory bail in the criminal proceedings on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ltd. (1981) Vol.51 CC 778. This Board held in Vikas WSP Limited and Ors. v. Union of India (Order dated 25.08.2005 in CP. No. 50 and 51 of 2003) that when the company has not carried its affairs prudently and have violated provisions of various acts of Government including violations of provisions of the Companies Act, 1956 the CLB may direct the Central Government to appoint board of directors for a specified period of time. The petitioner is a minority shareholder and major creditor and has every right to enforce its legal right against the Company and therefore, urged for the reliefs claimed in the petition. 3. Dr. K.S. Ravichandran, learned Authorised Representative of the respondents 1, 2 5 to 10 opposed the company petition on the following grounds: * The petitioner having failed to commence and implement the golf course project was looking for a suitable entrepreneur in order to divest its shareholding in the Company. Accordingly the agreement dated 19.07.2004 came to be executed, pursuant to which the petitioner shall offer to sell to the second respondent and/or his nominees 243 lakhs equity shares of ₹ 10 each in the capital of the Company for a lump sum co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorised representative of the petitioner, pursuant to the directive of the Arbitral Tribunal, visited the administrative office of the Company and inspected the original title deeds of the Company and all the original share certificates issued in the name of the second respondent and his nominees as borne out by his endorsement made on 03.11.2005. The respondent has not pledged either the share certificates or the title deeds of the Company to any foreign company. There has been no violation of the provisions of the Act or FEMA, as alleged by the petitioner. The second respondent, on the other hand, is in custody of the share certificates and the title deeds of the Company. These charges have not been established by adducing any evidence in this behalf. * The allegations of the petitioner regarding the conduct of the second respondent in transactions with several of the entities are neither relevant nor established. All the relevant materials and parties are not before the CLB and they are matters requiring examination and cross examination of witnesses, before other courts of law, which cannot be agitated in the present proceedings. The Supreme Court in Sangramsinh P. Gaekwc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Income Tax (Appeals) and the appeal is still pending and therefore any findings therein cannot form the basis for deciding the issues before the CLB. The petitioner obtained copy of the Income Tax Assessment order in an illegal manner and justifies its production on the basis of certain case laws. The decision in Pushpadevi M. Jatia v. Union of India and Ors. (supra) covers cases where evidences are bad of procedural irregularities. Whereas, in the present case, there is specific provision as to the confidentiality of the assessment order. * The second respondent had increased the share capital with a view to settle the dues of the Company, after due notice of the extra-ordinary general meeting, sent to the petitioner on 01.10.2004 by ordinary post. The petitioner did not choose to attend the general meeting. The eighth respondent, a nominee of the second respondent, had invested a sum of ₹ 25 crores towards the equity of the Company. The Income tax assessment order reveals that the petitioner is aware of the increase in authorized capital of the Company and issue of further shares as early as in February 2005. However, the only demand of the petitioner, as borne out by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing downstream investments in various sectors including hotels and resorts. The application is a matter of record and it had clearly mentioned that the Eighth Respondent would invest in the equity of the First Respondent. Very clearly the amount transferred to the First Respondent was mentioned and approval was sought . (para Nos. 32 33 in page 8 of counter of the Company). The categorical finding of the Delhi High Court in its order dated 18.1 1.2005 would show that the amount of ₹ 78.35 crores remitted in the account of DAIL maintained with ABN Amro Bank, was received through its subsidiary namely, Data Access US. There is, therefore, no illegality on the part of the Company in having received 25 crores through the eighth respondent from the account of DAIL. * Prior to the impugned allotment, an extra ordinary general meeting of the Company was convened and conducted on 20.10.2004 for approving the preferential allotment of shares to the eighth respondent. Thereafter, at an yet another extra ordinary general meeting held on 28.10.2004, the authorised capital was increased from ₹ 27 crores to ₹ 53 crores. The impugned allotment is supported by consideration, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quirements. The petitioner's real intention is to set aside the impugned allotment of shares for certain collateral purposes. Even if the impugned allotment of shares is cancelled, the amounts brought into the Company will remain to be due to the respondents and any relief of setting aside the allotment will not put an end to the disputes between the parties and any such direction would unfairly prejudice not only the respondents but also the petitioner. Therefore, the further issue of shares cannot be challenged by the petitioner. * The petitioner managed the Company for over a decade in such a way that its net worth eroded and the shares were sold for ₹ 1/- per share. The petitioner cannot expect the respondents to bring about a turn-around in a period of one year of taking over of the Company. The problems faced by the Company are temporary in nature and it would be possible for the respondents to commence and implement the project under their leadership. Merely because the Company has stopped its business temporarily or the Company is incurring losses, it cannot be ordered to be wounded on account of loss of substratum. The Company's assets are intact and are v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... otifying the change of the registered office of the Company to Kothari Road as well as K.S. Mansions has been filed by the Company Secretary. * Non compliance with the provisions of the Act, mere irregular, illegal, invalid acts by themselves cannot support a petition under Section 397/398. These acts, unless they are oppressive to any shareholder or prejudicial to the interest of the company or to public interest, cannot support a petition under section as held in G. Govindaraj v. Venture Graphics (P) Limited (supra). Furthermore, the petitioner complained of violation of the various provisions of the Act, all of which are more or less of procedural requirements and in no way would result in oppression and mismanagement. The allegations of mismanagement remain without any proof by petitioner. There is no prosecution pending against the second respondent for violation of any of the provisions of FEMA and the pending criminal proceeding is in respect of a chit transaction, which is not relevant to the present case before the CLB. * The respondents 5 6 belatedly consented to act as directors, which will not impair their functioning as directors of the Company. By virtue of Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... surance Corporation ('OARC'), a company incorporated in accordance with the laws of the State of Connecticut, USA had given a loan for an amount of US $ 17,000,000/- (₹ 78,45,50,000/-) in favour of Data Access US, a body corporate organised under the laws of the State of Delawave, USA and a wholly indirect subsidiary of DAIL. The loan proceeds were to be onward lent to DAIL in accordance with applicable laws and regulatory approvals. However, the loan proceeds were inappropriately remitted by Data Access US in favour of DAIL as payment of receivables for services rendered by DAIL, which came to be diverted to the eighth respondent, out of which a pay order of ₹ 25 crores was issued on 28.10.2004 in the name of the Company. Thus, the sum of ₹ 25 crores brought into the Company through the eighth respondent originally formed part of the loan proceeds wrongfully remitted to the account of DAIL by way of receivables. The petition does not disclose any genuine cause of action against this respondent. There is no relief sought against this respondent. The various allegations raised against this respondent are frivolous and unnecessary. 5. According to Ms. Sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for breach of the contract, which are covered under Clauses 5 23A respectively of the agreement. The allegations of oppression and mismanagement brought out in the company petition shall be adjudicated, without reference to the terms of the agreement and accordingly the prayer of the respondents to refer the parties before the CLB to arbitration, in terms of Section 8 of Arbitration and Conciliation Act came to be rejected. The appeal preferred by the respondents against the order dated 27.12.2005 was dismissed by the Madras High Court. In view of these developments, the grievances of the petitioner that the second respondent and his nominees failed (a) to discharge the liabilities of the Company; (b) to relieve the petitioner from the guarantee obligations and (c) to reimburse the expenses incurred by the petitioner in terms of the agreement and the consequent prayer Cor return of the shares by the second respondent and his nominees which have been transferred in their names, pursuant to the agreement shall necessarily be agitated before the Arbitral Tribunal, more so, when these charges are found flowing from the agreement dated 19.07.2004. No remedy is possible before the CLB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Dr. K. Ravichandran at the time of his oral submissions. It is on record that the fifth respondent one of the directors of the Company has sworn to an affidavit on 13.07.2006 to the effect that the seventh respondent holding only one share in respect of folio No. 28 has already nominated a person by name Mr. K. Chenniappa Gounder, as the holder of the said share retaining the beneficial interest thereof with the seventh respondent, which has been taken on record by the Company at the meeting of the board of directors held on 12.06.2006. It is seen from the extract of the relevant resolutions that the board of directors accorded its consent to the above arrangement in respect of one share bearing distinctive No. 64, which has been followed by necessary declarations filed under Sub-section (2)/sub-section (3) of Section 187C of the Act with the Registrar of Companies. With the nomination of Chenniappa Gounder as the holder of one share in respect of folio No. 28, retaining the beneficial interest with the seventh respondent, the Company at present comprises of seven members. In view of this, the apprehension of the petitioner on account of number of members, does no longer surviv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ental by the frequent shifting of the registered office, involving additional expenditure, which is held to be an act of mismanagement in Akbarali A. Kalvert and Anr. v. Konkan Chemicals Pvt. Ltd. and Ors. (supra). It is claimed by the respondents 3 4 that (a) they never consented to act as directors of the Company; (b) their signatures in Form No. 29 are obvious forgery; and (c) they never acted as directors of the Company. The income tax assessment order shows that the signatures of the respondents 3 4 as appearing in Form No. 29 are entirely different from their admitted signatures in the joint venture agreement dated 31.01.2004. Similarly, the handwriting expert's opinion dated 18.07.2006 produced by the third respondent confirms that the alleged signature of the third respondent in form No. 29 is forged. Though, Dr. Ravichandran reiterated that the respondents 3 4 were directors of the Company till they resigned from the office of director, there is no material such as the register of directors, or the minutes of the board meeting or any other material document evidencing participation of the respondents 3 4 in the affairs of the Company as directors, which must, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplied with by the Company, thereby attracting the penal provisions contained in Section 292A. These gross irregularities and violations of the Act would indicate that the affairs of the Company are not being prudently managed by the second respondent and his nominees, causing immense prejudice to the Company and its members. The respondents cannot, therefore, take any shelter under the decision in G. Govindaraj v. Venture Graphics (P) Limited (supra), on the ground that mere irregularities cannot support a petition under Section 397/398. There is not even any explanation from the second respondent and his nominees for their failure to meet the essential statutory requirements of the Act. These state of affairs of the Company indicate beyond doubt that all is not well in the day to day management of the Company warranting an investigation into its affairs. The purpose of investigation is to find out as to whether who are in-charge of the Company and whether those in-charge of the Company are guilty of irregular conduct of the affairs of the Company. The facts and materials before me do reasonably suggest and are sufficient to form a prima facie opinion in tenns of Section 237(b)(i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edings of such a meeting are illegal as held in Akbarall A. Kalvert and Anr. v. Konkan Chemicals Pvt. Ltd. and Ors. and Martin Castelino v. Alpha Omega Shipmanagement (P) Limited (supra). Similarly, any allotment of further shares bypassing the prescribed procedure of sending the notice of meeting would constitute an act of oppression, as held in C.N. Setty v. Hillock Hotels (P) Ltd. and Ors. (supra). The Company, while elaborating before the Delhi High Court in the proceedings in connection with DAIL initiated by one of its creditors, about the arrangement reached between the petitioner and the second respondent on disposing of the petitioner's shareholding, controlling and management interest in the Company in favour of the second respondent, by virtue of the agreement dated 19.07.2004, categorically contended that the eighth respondent, herein, a nominee of the second respondent invested a sum of ₹ 25 crores in the equity of the Company as per the payment made in the month of October, 2004 thereby increasing the total paid up capital of the Company to ₹ 52 crores. By virtue of the said investment, the eighth respondent is holding 48% of the equity in the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the bank over this money. Furthermore, in case it is found ultimately that the money is to be refunded to Odyssey Re etc., appropriate orders can be passed directing Canara Bank to refund the amount and the bank has sufficient means to carry out such directions. Appropriate orders shall be passed in the company petition as to how this amount is to be dealt with depending on the nature of the final orders passed in the company petition. By virtue of the order dated 18.11.2005, the plea of the Company that the amount of ₹ 25 crores belong to it stands rejected. The consequence of the High Court Order would be that the amount of ₹ 25 crores invested in the Company by the eighth respondent, out of the remittance from DAIL will either go to Canara Bank or DAIL, as may be ordered by the High Court in terms of para 72 of the Order dated 18.11.2005. It shall be borne in mind that the income tax assessment order dated 23.02.2005 describes the amount of ₹ 25 crores in the Company's account as unexplained share capital. It is immaterial to look into the source of obtaining the assessment order by the petitioner, in view of the fact that the second respondent has h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsfer of funds in the minimum possible time. The funds need to be transferred immediately to Canara Bank as we are in urgent need of funds for meeting some of our urgent commitments. We assure you that this account will be closed by us as soon as the funds arc transferred to the Consortium Bankers. We shall appreciate if an early action is taken in the matter. Therefore, the above undertaking of DAIL clearly indicates that the moneys namely, ₹ 78.45 crores must be transferred by DAIL to Consortium Bankers in which case the Company cannot make any claim over ₹ 25 crores brought in by the eighth respondent from the remittance of DAIL. The second respondent has agitated in the present proceedings the very same plea regarding the source of funds, increase of capital, infusement of funds by the eighth respondent and allotment of 2.50 crores equity shares in favour of the eighth respondent, which has been raised before and rejected by the Delhi High Court. I cannot, therefore, come to any other conclusion than the categorical finding of the High Court elaborated herein above. It is relevant to observe that the application made by Company before the Delhi High Cour ..... X X X X Extracts X X X X X X X X Extracts X X X X
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