TMI Blog2014 (9) TMI 1279X X X X Extracts X X X X X X X X Extracts X X X X ..... shareholding between the petitioners group and the respondents group are not acceptable. Allotment of shares - HELD THAT:- There is no loss of negative control of the petitioners group as a result of impugned allotment. The case of Clemens is distinguishable because in that case, there were only two shareholders and a closely held family company between an aunt (55%) and a niece (45%) unlike the present case where there are numbers of shareholders and also directors, some of whom are outsiders. It is also pertinent to mention that the Articles of Association in the Clemens case, contained a negative covenant that provided non-transfer of shares unless a family member declines to accept the same which is not the case in the instant petition. Thus, the relevant case is of no assistance to the petitioners. Time limitation - HELD THAT:- The petitioners did not challenge the impugned allotment within the limitation period as prescribed in law which is three years. In the case of ABP [ 2008 (1) TMI 967 - COMPANY LAW BOARD] , it has been held that wrongful allotment of shares can have continuous effect so as to support a case of this nature. However, it is an admitted position i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lders including petitioners. The bonus shares appear to have been issued in accordance with law and no ground has been made out by petitioners to show that issue of such bonus shares are in violation of the provisions of the Companies Act, 1956. Accordingly, no Interference is called for against such issue of bonus shares and the ground raised by the petitioners in this respect fails. Allegation of lack of fiduciary duty on the part of the respondents to acquire a BMW car costing ₹ 51 lakhs when the average profit of the company was ₹ 35.06 lakhs per year - HELD THAT:- The necessary explanation has been provided by the respondents as recorded in para 3 (xxiv) of this order and there are no irregularity or defect in acquiring such BMW car for official use in running the business affairs of the company and there has been no financial impropriety or lack of probity in such acquisition of car resulting in alleged mismanagement of the company. On determination of the value, in case the respondent group is willing to purchase the shares held by the petitioner group, they should pay the consideration within four weeks thereafter. Otherwise, the respondent company will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... over the existing business of a partnership firm, namely, Glamor Polish Industries (abbreviated as G.P.I.) which was a partnership between Shri S.C. Agarwal and Late Purnanand Garg (father of R-2). The father of petitioner No. 1 contributed to the capital of the said firm and also lent and advanced moneys to G.P.I. After the business of G.P.I. was taken over by the respondent company, the loan given by father of petitioner No. 1 was converted to equity in the said company. At all material times, both the branches of the Garg family treated the company as a partnership on 50:50 basis between the two branches. iv) Both brothers, namely, late Parmanand Garg and Late Purnanand Garg owned land in plot measuring 10 acres in Purulia Road, Tatisilwal, Ranchi, Jharkhand. The said plot was transferred to the respondent company and the present factory was built thereon. Similarly, the branch office of the company situated in Ranchi at 68, Kanke Road, Ranchi, was jointly owned by the brothers and was transferred to the company in the year 1990. v) The petitioner No. 1 is son of late Parmanand Garg and was inducted in the respondent company as a management trainee In the year 1973 when th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lenged the impugned allotment of shares on the ground that the applications of the petitioners were rejected on flimsy grounds by respondent No. 2 with a malafide intention to wrongfully increase the shareholdings of the respondents and reduce the shareholding of the petitioners. It has been also submitted that the company was in no need of funds and such allotment was a device to reduce the shareholdings of the petitioners into a minority. viii) In or about 2003, petitioner No. 1 was removed from Whole Time Director of the said company when he was at 49 years of age. Till 2003, petitioner No. 1 had devoted his entire time for the company. On being asked to specify the reasons for his removal, respondent No. 2 assured petitioner No. 1 that he would continue to enjoy all facilities as he had enjoyed as Director of the said company. However, with passage of time, respondent No. 2 started to misbehave, ill-treat and ignore presence of petitioner No. 1 in the affairs of the company. In the Board meetings of the respondent company, respondent No. 2 used to prevail and all the agendas used to be handled as per his wishes and resolutions used to be passed as he deemed fit. None of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company with turnover of ₹ 46.00 Crores and net profit of ₹ 42.5 Lakhs has been arrived at ₹ 46.00 Lakhs by the respondents for their own benefit. Further, the shares have been issued at ₹ 15/- per share when the profit per share is ₹ 13.77 and price to earning (PE) ratio is 1.08 times. As a result of this issue, the net worth of the company has increased by mere 6.8%, even though share capital has expanded by 130%. e) As per Board meeting dated 21st August, 2009, in which the impugned shares were allotted, the audited Balance Sheet and Profit Loss Account for the financial year 2008-09 was approved by the Board. As per such Balance Sheet for the year ended 31st March, 2009, the sales have been shown at ₹ 52.7 Crores, profit after tax has been shown at ₹ 56.25 lakhs and earning per share is ₹ 18.23 per share. Thus, at the time of allotment of shares at ₹ 15/- per share, these shares were already earning ₹ 18.23 per share and the company has been valued at less than the profit for the year. Apart from this, as on 31st March, 2009, the total debt of the Company was ₹ 2,68,56,076/- and the cash and bank balance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id resort and the equipments like vehicles, furniture and fixture, Wind Mill etc. have been diverted from WIL and the employees working in STC are in pay roll of WIL. STC operates from the registered office of WIL and the largest customer of STC is WIL also. Respondent No. 2 is diverting the business of R-1 Company to his own proprietorship firm which is prejudicial to the interest of the respondent company. xiv) The Research and Development Laboratory of the respondent company has been shown to be situated at 62, Jatin Das Road, Kolkata 700 029 being the residence of respondent No. 2. All the household expenditure of respondent No. 2, like, electricity, generator, telephones, repairs, entertainment, staff etc. are shown For the expenses of R D Laboratory and are charged from the account of the respondent company causing loss to the company. xv) The education of both children of respondent No. 2 has been financed by the respondent company which is apparent from the board meetings of the company. In fact, son of respondent No. 2 is still studying in U.S.A. at the expense of the respondent company, as evident from of the copy of the notice of the board meeting dated 16.05.2006, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany in accordance with laws. (b) To take or otherwise acquire and hold shares in any other company or Companies having objects altogether or in part similar to those of this company or carrying on any business capable of being conducted so as directly or indirectly to benefit this Company either in this Country or in a Foreign Country. (2) To consider and if thought fit to pass, with or without modifications, the following resolution as a Special Resolution:-- RESOLVED that pursuant to the provisions of Section 81(1A) and other applicable provisions, if any, of the Companies Act, 1956 ( the Act ) and the provisions of the Unlisted Public Companies (Preferential Allotment) Rules, 2003 ( the Rules ) and in accordance with the provisions of the Memorandum and Articles of Association of the Company and subject to such other consents, approvals permissions as may be necessary, the Board of Directors ( the Board ) of the Company be and is hereby authorized to offer, issue and allot up to 2,00,000 (two lakhs) equity shares of ₹ 10/-(Rupees ten) each for cash at a premium of ₹ 10/- (Rupees ten) per share to such persons, bodies corporate and other investors as the B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the Memorandum of Association, as altered. xix) According to the petitioners, if the aforesaid resolutions are passed, a new partner would be inducted into the company which is already in the nature of a quasi partnership without taking his consent and will change the shareholding of the company for which the petitioners are not agreeable. Further, the proposed resolutions are in violation of the family understanding in relation to the company and if allowed, would cause loss to the petitioners. There is no need to form a joint venture company in Sri Lanka as the company itself is capable enough to provide the business and thus, the proposed resolutions are nothing but a device to defraud the company by siphoning away its funds. The petitioners are in a position to subscribe to any equity shares and there is no requirement for inducting any new partner that would upset the present position of equal share holding in the company. In addition, the explanatory statement annexed to the notice has also been challenged as being vague because, as a result of such resolutions, the book value of the company would get reduced by 20% causing serious prejudice to the interest of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rly stated that no rights are to be claimed on the basis of allotment of 2011. As such, the bonus issue could not have been made and accordingly such issue, if made, is liable to be cancelled, because it really has served no purpose towards the benefit of the company. 3. As against the above averments of the petitioners, the respondents have made following submissions as per various affidavits drawn as available on record:-- (i) The petitioners do not have the requisite shareholding to lodge the petition because the concerned letters obtained by them from some of the shareholders are vitiated as the said letters were obtained much prior to the initiation of the proceedings. To be specific, even though the company petition has challenged events, the cause of which arose on 14th March, 2011, the concerned letters were procured much prior to such events, i.e., in the year 2010. Further, one of the consenting shareholders, namely, Mrs. Anima Devi has contended in a letter addressed to the company that she had never signed any consent letter for institution of the company petition. (ii) Petitioner No. 3 is not a shareholder as his shares were neither lodged nor registered and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r No. 1 and petitioner No. 3 on 29th October, 2010 and 30th November, 2010, was only done for the purpose of filing of the instant petition. If the petitioners were aggrieved by any genuine acts of mismanagement and operation in the hands of the respondents, they would not have bought further shares in the company. (vi) The company petition has been initiated at the behest of local competitors of the company in the business of manufacturing Polishes. One ex-employee, namely, Mr. Tiwari residing in Ranchi has started his business of manufacturing polishes under the name and style of Glowax Industries . Petitioner No. 1 also stays in Ranchi. The litigation is being financed by the competitor as he wants to take over the polish business of the company through the petitioners. (vii) Petitioner No. 1 became Director in the company in 1986 and he ceased to be a whole time director since October, 2003 and ultimately, he was removed from directorship on and from 28th June, 2007. The removal has been done by invoking provisions of Section 283(1)(g) of the Companies Act, 1956 as he failed to attend 5 consecutive Board Meetings even after receiving due notices. In fact, petitioner No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntioned by the company was posted on 15th July, 2009, has been procured by petitioners will be evident from the following facts:-- (a) The said letter was in reply to a letter dated 12.05.2011 by the Advocate of petitioners. (b) Under Right to Information Act, the Postal department has confirmed by letter dated 25.08.2011 (Ref: Pg.24 of reply to supplementary affidavit annexed and marked as W-36 ) and letter dated 06.09.2011 (Ref: Pg. 26 of reply to SA annexed and marked as W-37 ) that no record is maintained in post offices in respect of Under Certificate of Posting . Therefore, petitioners could not have obtained any letters from Dharmatala Post office that no articles were posted by company on 15.07.2009 under UCP. (c) The letter dated 16.06.2011 was obtained by petitioners privately, whereas the information by respondents was obtained under RTI Act. Therefore, the presumption is that the notices have been received by the petitioners. It has been contended further that non-receipt of notice by any member shall not Invalidate the proceeding at the meeting as per Section 172(3) of the Companies Act, 1956 and that the company have complied with the provisions of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 010 for convening of EoGM dated 23.03.2011 were received by petitioner No. 1 and petitioner No. 2 and the explanatory statement was sent along with such notice. Special Resolution under Section 81(1A) of the Companies Act, 1956 was adopted in EoGM held on 23.03.2011 and the minutes have been annexed at Page 126 of reply to C.P. annexed and marked as W-60 which will show that special resolution was passed unanimously. Petitioner No. 1 and petitioner No. 2, in spite of receipt of notice, did not attend such EoGM and did not oppose the passing of resolution. Petitioner No. 1 and petitioner No. 2 are therefore, estopped from challenging the preferential allotment. (xii) At the time of the issue of notice, the business in Sri Lanka was a proposed business and the company was in the process of identifying a Joint Venture partner and such decision was of the Board of Directors against which the minority shareholders cannot interfere. Further, details of financial arrangements in respect of joint venture to be made available in the explanatory statement, are not obligatory. The company's financial arrangement with any proposed joint venture party is not required to be disclosed as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HRL. In this regard, it has been submitted that the allegation is baseless as WHRL is marketing the company's resort located at Jalpaiguri in respect of which WHRL is earning a commission from the respondent company. In course of such marketing the property of the company, question does not arise of any diversion of business of the company to WHRL, more so because WHRL has no hotel or resort of its own and thus, there is no conflict of interest. (xvi) As against the allegation of the petitioners regarding the proprietary business of respondent No. 2 in the name of Sundarban Tiger Camp (STC), it has been contended that the said property does not belong to the respondent company and therefore, it does not make any concern for the petitioners. (xvii) On the issue of bonus shares, it has been contended that such shares were issued by the company to celebrate its platinum jubilee and the same was stated in the explanatory statement accompanying notice dated 04.05.2011 in respect of convening EoGM on 31st May, 2011. There cannot be any complaint in relation to issue of bonus shares because even the petitioners themselves received the same. Based on the above, the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1 contributed partly towards the capital of the said firm and loan given by father of petitioner No. 1 was subsequently converted to equity in the said company. Thus, the original partnership for running Glamor Polish Industries (GPI) which was subsequently taken over by the respondent company was not set up by joint participation of Late father of petitioner No. 1 and Late father of respondent No. 2. Further, the father of petitioner No. 1 became director in the company only on 14.10.1958, while the company was established in 1950. No further evidence has been brought on record by the petitioners to justify setting of the company jointly by the Late father of petitioner No. 1 and Late father of respondent No. 2. Therefore, the contentions of the petitioners that the company has been run on quasi-partnership principle having equal shareholding between the petitioners group and the respondents group are not acceptable. 6. Another important aspect which needs to be considered is the conduct of the petitioners in lodging the instant petition. The petitioner No. 1 joined the company as management trainee in the year 1976 and he was elevated to Executive Director of the company toge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... group. However, the petitioners could not defend their case of rejection of application for allotment of shares which was defective on the ground of such application being made on joint shareholding without mentioning PAN number of the applicant which was a mandatory requirement for filing such application. As regards the loss of negative control of the petitioners group, reliance has been placed in the case of Clemens v. Clemens Bros. Ltd. Anr. [(1976) 2 All ER. 268]. However, in 1995, petitioner No. 1 and petitioner No. 2 held 10.14% and 6.96% of the then issued, subscribed and paid up capital of the company. Therefore, there is no loss of negative control of the petitioners group as a result of impugned allotment. The case of Clemens is distinguishable because in that case, there were only two shareholders and a closely held family company between an aunt (55%) and a niece (45%) unlike the present case where there are numbers of shareholders and also directors, some of whom are outsiders. It is also pertinent to mention that the Articles of Association in the Clemens case, contained a negative covenant that provided non-transfer of shares unless a family member declines to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection 81(1A) of the Companies Act, 1956. The notice of EoGM in relation to the allotment of shares was stated to be sent to the petitioners under Certificate of Posting. The proof of despatch of notice has been annexed at pages 103-104 of reply to C.P. A number of shareholders have confirmed receipt of such notices of EoGM dated 07.08.2009 as evident from pages 32-50 of reply to supplementary affidavit dated 8th November, 2011. The petitioners have relied on the letter of Postal department dated 16.06.2011, wherein it has been intimated by Dharmatala business office of the Postal department that no articles as per the enclosed chart were posted by the respondent company on 15.07.2009 under UCP. On the other hand, as per reply against information sought under RTI Act, 2005 by the respondent company, the Postal department vide its letter dated 06.09.2011 has intimated that there is no record maintained in post offices. In respect of under Certificate of Posting (UPC) , Because of the reason that a number of shareholders confirmed the receipt of notices of EoGM dated 07.08.2009 and the Postal authorities have indicated that no records are maintained in the post offices in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed in 2009. Further emphasis has been placed by the respondents on the fact that majority of other shareholders have received such notices under UCP and had attended the meetings. 10. The aforesaid allotment of 2009 has also been impugned by the petitioners on the ground that allotment of shares to majority group themselves is oppressive by placing reliance on Shanti Prasad Jain v. Kalinga Tubes Ltd. [AIR (1965) SC 1535]. This judgement has been sought to be distinguished by the respondents on the ground that in the said case, the petition was dismissed. However, in the instant case, there is no lack of probity in allotting shares to the respondent group as the petitioners have not participated in the affairs of the company and consolidation of shares by the majority will not be oppressive because it is to ensure that the company gets managed properly. Admittedly, the petitioner No. 1 has not participated in the meetings of the company since long nor has he expressed any legitimate expectation in this regard. The respondents have placed on record the necessary documents to show as to how the allotments of shares were made in 2009 and the petitioners have not been able to dislodg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that need to be kept in perspective since the respondents were only trying to find the suitable partner. The respondents have already filed the details of such partners along with reply and therefore, according to the respondents, no further cause of action lies in the matter. Since the business by way of joint venture with Sri Lankan partner has not fructified finally, the challenges made by the petitioners In this regard have lost its meaning and therefore, no further interference is called for on this issue. 14. The petitioners have challenged the valuation of shares arrived at by the company. According to the respondents, such valuation was undertaken by its statutory auditors based on accepted principles of valuation. It has been submitted that petitioners have given four different kinds of valuation where the shares of the respondent company have been valued at ₹ 38.76, ₹ 60/-, ₹ 281/- and ₹ 285/- which shows that even the concerned valuers have valued the shares differently and therefore, it has been contended that such valuation could not be relied upon. The respondents have relied on the case of Hindustan Lever Employees Union reported in AIR (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the company and there has been no financial impropriety or lack of probity in such acquisition of car resulting in alleged mismanagement of the company. 18. It has been alleged by the petitioners recorded at para 2(xii) of this order that the tourism business of the respondent company is diverted to WHRL, a company controlled by respondent No. 2 and his family members causing loss to the respondent company. However, it has been submitted by the respondents that WHRL is marketing the company's resort located at Jalpaiguri for which WHRL is earning commission from the respondent company. Thus, there is no question of diversion of business of respondent company to WHRL. I do not find any merits in the allegations of the petitioners because WHRL does not own any hotel or resort in its name and therefore, question of diversion of any business of respondent company does not arise. WHRL is only earning commission for booking of customers in the resort at Jalpaiguri owned by the respondent company. Further, according to petitioner, it has been sharing profit margin of 55% which is taxable in the hand of WHRL, causing no prejudice to the interest of the company. Therefore, allegati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and financed by respondent company and if so, the resolutions of Board Meetings to be seen in this regard and otherwise, total of such expenses to be quantified. After quantification of the aforesaid expenses, if respondent No. 2 fails to offer any reply towards justification of incurring of such expenses in the hand of the respondent company, respondent No. 2 is hereby directed to refund such inadmissible expenses to the till of the respondent company and the auditor shall pass necessary accounting entries in the books of accounts of the respondent company on the strength of this order. 23. The respondents filed CA No. 177 of 2011 highlighting various instances of false and incorrect statements made by the petitioners deliberately for which no plausible explanations could be offered in the reply affidavit of the petitioners. The petition was claimed to be filed with support of some consenting shareholders out of which one consenting shareholder, namely, Mrs. Anima Devi, has written to the company that she has never signed any consent letter for institution of the company petition. These facts indicate that conduct of the petitioners was not bonafide in instituting the petiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st such valuation within 7 days of completion of valuation report to the respondent company and after verification of the same, the respondent company will release the payment to the valuer. 28. After carrying out the mutual obligations cast on the petitioners and respondents as per this order, an affidavit of compliance shall be drawn by both the parties within 7 days of such compliance and the same should be produced before the Bench Officer for taking the same on record. The statutory auditor, after complying with the directions contained in this order, shall draw an affidavit to the said effect and furnish the same to the Bench Officer within 7 days of such compliance for keeping the same on record also. 29. In compliance to the order of Hon'ble High Court of Calcutta dated 6th April, 2011 (APOT No. 134 of 2011, ACO No. 37 of 2011), the question of undervaluation of shares has been looked into and it is decided against the petitioners because the allotment of shares made on 23.03.2011 @ ₹ 20/- per share including premium of ₹ 10/- has been upheld. Therefore, the respondent beneficiaries of the equity shares allotted on preferential basis can claim such rig ..... 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