TaxTMI 
TaxTMI 
1989 (11) TMI 273
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....a direction be given that the function of the managing director be carried out jointly by the managing director and the joint managing director; (d)that a fresh audit of the books of account of Deccan Enterprises Private Limited be ordered for the periods ended March 31, 1988, and March 31, 1987, by an auditor to be appointed by this court; and (e)that the proceedings of the meeting of the annual general body conducted on July 5, 1988, be declared void." The managing director of the company (third respondent) and his group oppose these applications and a counter-affidavit of the third respondent sworn to on September 23, 1988, has been filed. The petitioners in the company petition support the applications and the counter-affidavit of the first petitioner sworn to on March 2, 1989, has been filed. The ninth respondent filed a reply affidavit sworn to on April 10, 1989. The second respondent has filed an affidavit sworn to on September 28, 1989, and petitioner No. 1 has filed an affidavit sworn to on September 29, 1989. A further affidavit of the third respondent sworn to on October 5, 1989, has also been filed. For the sake of convenience, the parties are hereafter referred to ....
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....with persons connected with trade in this country and abroad. The first respondent-company was set up as an ancillary unit to the said Hyderabad Industries Limited and petitioner No. 1 and respondent No. 9 with their contacts developed a market for the products of this company. Respondent No. 3, who was a fresh graduate at about the time of incorporation of the company has been functioning as the managing director of this company ever since. Respondent No. 1 (company) has established a joint venture company in the Middle East which has been yielding substantial profits every year. The parties had, during the course of the years, set up other companies, viz., Nucon Private Limited, having its plant at Hyderabad, Deccan Polymers Limited, with a plant at Kandla Free Zone area and a partnership firm by name Secunderabad Agencies. The plant at Kandla Free Zone area was to produce products similar to those of the first respondent-company, but was established there to avail of the incentives offered by the Government. However, as the advantage of the incentives soon disappeared, the plant was shifted to Hyderabad in about 1983-84. In the company petition, a counter-affidavit of the third....
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....ion restraining the seventh respondent from functioning as director and Company Application No. 193 of 1987 is for an injunction restraining the third respondent from functioning as managing director. Company Application No. 196 of 1987 is to appoint an interim committee of management and Company Application No. 207 of 1987 is for an injunction restraining the third respondent from operating the bank account or spending any monies which come to his hands as managing director. Counters have been filed in these applications but they have not been disposed of so far. C.A. No. 197 of 1987 seeking an injunction against the third respondent from functioning as a director of the foreign joint venture company has been disposed of on October 14, 1987. Respondent No. 9 has filed the present applications, that is, C.A. Nos. 184 to 188 of 1988, for the reliefs briefly noticed earlier. After the framing of issues and filing of documents, the petitioners filed C.A. Nos. 151, 152 and 154 of 1989 to summon certain documents pertaining to the company and respondent No. 3 and his family, etc., (sic) from the State Bank of India and Andhra Bank counters were filed by respondent No. 3 and after hear....
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....taken, etc., the focus during the hearing turned on the aspect about the legality and validity of the decision to increase the authorised capital, its allotment to respondents Nos. 3 to 6, the receipt of any advantage by the company and the availability of funds with respondents Nos. 3 to 6 to pay for the said issue. Paragraphs 19A, 22, 53, 54, 61 and 62 of the company petition; paragraph 50 of the counter-affidavit of the third respondent sworn to in July, 1987; and counter-affidavits of the ninth respondent and the rejoinder of the third respondent to the said affidavit of the ninth respondent as well as issue No. 3 reflect this aspect of the controversy. The other controversies are not being dealt with now. In brief, the case of the petitioners and the ninth respondent is that the third respondent had brought into existence material to show that additional capital was issued and allotted to him and his family members (respondents Nos. 4, 5 and 6) some time during November, 1984, to February, 1985, with a view to change the shareholding pattern of the company. It is also contended that respondents Nos. 3 to 6 did not have the necessary funds available at that time to subscribe f....
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....ntended by respondents Nos. 1 and 3. The minutes of the meeting of the board of directors held on November 26, 1984, marked as exhibit ZB-1 read as follows: "Deccan Enterprises Private Limited. Minutes of the meeting of the board of directors of Deccan Enterprises Private Limited, held on Monday, November 26, 1984, at 11 a.m., at the registered office of the company at 5-2-175/1, Rashtrapathi Road, Secunderabad-500 003, Andhra Pradesh. Present: Mr. O.P. Jalan Mrs. Sudha Jalan. 1.Mr. O.P. Jalan took the chair. 2.Leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan. 3.Minutes of the previous meeting of the board of directors held on 3rd November, 1984, were read, confirmed, initialled and signed by the chairman. 4.The managing director informed the board that presently the company is having recession for the products presently being manufactured by the company. It is, therefore, envisaged to diversify and start producing new range of products for which additional capital equipment, etc., is required. The financial position of the company is very tight. It was, therefore, suggested to the board to increase the paid-up capital of the company by creation and issue ....
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....drawn on their respective savings bank accounts in Andhra Bank, Hyderbasti branch and the first respondent-company also has a current account in that branch. The amounts were also credited in the company's ledger as share application money. The minutes of the next meeting of the board held on January 5, 1985, now marked as exhibit ZB-2 read as follows: " Deccan Enterprises Private Limited Minutes of the meeting of the board of directors of Deccan Enterprises Private Limited held on Saturday 5th January, 1985, at 11. a.m., at the registered office of the company at 5-2-175/1, Rashtrapathi Road, Secunderabad-500 003, Andhra Pradesh: Present: Mr. O.P. Jalan Mrs. Sudha Jalan 1.Mr. O.P. Jalan took the chair. 2.Leave of absence was granted to Mr. S.K. Jalan and Mr. R.N. Jalan. 3.Minutes of the previous meeting of the board of directors held on 26th November, 1984, were read, confirmed, initialled and signed by the chairman. 4.Extension of last date for receipt of application for further issue of share capital: The board reviewed the position regarding further issue of share capital and noted that the last date fixed for the receipt of application for shares offered to them has e....
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....k relating to 30th November, 1984, marked as exhibit ZB-6; (e) a certificate dated September 14, 1989, issued on the letter-head of R.M. Trading Corporation, Madras, marked as exhibit ZB-7; and (f) another certificate dated August 19, 1989, issued by S. Daga and Company, Chartered Accountants, Hyderabad, marked as exhibit ZB-8. Again, with a memo dated September 27, 1989, respondents Nos. 1 and 3 have filed 16 documents with a list. Out of these, the documents relevant for discussion are: A certificate dated September 27, 1989, issued by Swami and Seshadri, Chartered Accountants, Hyderabad, marked as exhibit ZB-9; a certificate dated September 27, 1989, issued by the State Bank of India, Main branch, Hyderabad, marked as exhibit ZB-10; a xerox copy of the extract of savings bank account No. 28 of the third respondent with the same branch of the Andhra Bank in two sheets from 28th to 30th November, 1984 (one sheet) and 1st to 24th December, 1984 (another sheet), together marked as exhibit ZB-11; a xerox copy of an extract of savings bank account No. 691 of the fifth respondent with the same bank, marked as exhibit ZB-5(a); a xerox copy of an extract of savings bank account No. 1577....
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....s of the petitioners because of which diversification requiring funds was necessary. There is also a reference to the amounts of the company being locked up with Nucon Private Limited and Secunderabad Commercial Company (a partnership firm of the parties). Counsel for respondents Nos. 1 and 3 has placed reliance on exhibits B-29 to B-31 in support of the reason of pressure from the bank. Counsel for the petitioners and the ninth respondent referred to various allegations made by their clients in the affidavits disputing the aforesaid statements in the counter-affidavit of the third respondent. According to them, the reasons given in the counter-affidavit are an afterthought and invented for the purpose of these applications. No correspondence or documents indicating any pressure from the bank is filed. The reference is only to exhibits B-29 to B-31 letters of the bank in 1981 to increase the share capital. It is pointed out that there was an increase in the share capital in 1982 and the bank thereafter never wanted or wrote for increase of any share capital of this company. Similarly, no material is filed to show that the increase in capital was immediately intimated in writing to....
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....or the entire additional issue and deposited the cheques on November 30, 1984. Section 81 of the Companies Act does not apply to a private limited company but it is evident from the resolution dated November 26, 1984, itself that the board decided to offer the additional issue to all the existing shareholders. In view of this, it was necessary that an offer was sent to all shareholders. The letters alleged to have been sent do not indicate the number of shares offered to the existing shareholders and were sent under certificate of posting. Subscription was received for the entire additional issue of Rs. 5 lakhs on November 30, 1984, itself from respondents Nos. 3 to 6 but, in the meeting held on January 5, 1985, attended by the third respondent and the fourth respondent (husband and wife), time was extended for applying for the additional issue. There is no apparent reason for this after applications with cheques for the entire issue were already received, as no criteria were laid down regarding number of shares to be applied for by the existing shareholders either in the earlier letter or the letter now written. This intimation of extension of time is also said to have been sent b....
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.... the balance-sheet filed by respondents Nos. 1 and 3. According to them, the Indian sales had fallen for a couple of years resulting in losses because this very group had established a sister company called Deccan Polymers Limited under the same management and manufacturing the same items at a plant in Kandla Free Zone for the purpose of taking financial incentives. Subsequently, the factory of Deccan Polymers was shifted to Hyderabad and is not functioning. Thereafter, the sales of the first respondent-company have improved. It is also pointed out that, when an illegal action was taken to replace petitioner No. 3 by the third respondent as the nominee of the first respondent-company on the board of the foreign joint venture, it has been challenged in the Calcutta High Court. According to the third respondent, an understanding was reached among the members of the J group sometime in September-October, 1984 according to which the third respondent was to take over the first respondent-company and the ninth respondent was to take over Nucon Private Limited and, therefore, the ninth respondent did not subscribe for the additional issue of the first respondent-company. The circumstance....
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....plication money account Year 1984 Month and date Particulars Voucher or J.V. No. Folio Debtor Amount Rs. Creditor Amount Rs. Dr. or Cr. Balance Nov. 30 By Andhra Bank a/c JV400 153 60,000 30 By do. JV401 154 20,000 30 By do. JV402 154 4,00,000 30 By do. JV403 154 20,000 1985 March 4 To Share capital a/c JV575 216 5,00,000 5,00,000 5,00,000 Nil" The extract of current account of the first respondent-company with Andhra Bank, Hyderbasti branch exhibit ZB-3 and 3(a); extract of savings bank account of the third respondent with the same bank, that is, exhibit ZB-11; and the extracts of savings bank accounts of respondents Nos. 4 to 6, viz., exhibits ZB-4, 5(a), 6, 6(a ) with the same bank, throw some light on these transactions. Counsel for respondents Nos. 1 and 3 has also sought assistance from three certificates, exhibit ZB-7, dated September 14, 1989, issued by R.M. Trading Corporation, Madras; ex....
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....only) towards full and final settlement of their Bill No. Miscellaneous/P&M. dated December 1, 1984, for Rs. 4,55,000 (rupees four lakhs fifty-five thousand only) for supply of machinery and debited the said sum to the loan account of R.M. Trading Corporation, Madras, appearing in their books of account maintained for the year 1984-85. The above is certified as true and correct as per records produced for our verification. For S. Daga and Company, Chartered Accountants, Sd.................................. (Rajiv Dave) Partner" Exhibit ZB-7: "R.M. Trading Corporation 12, Sterling Road, Madras 600 034 14-9-1989 TO WHOMSOEVER IT MAY CONCERN This is to certify that we had taken a loan of Rs. 4,55,000 (rupees four lakhs fifty-five thousand only) from Deccan Polymers Limited on 1-12-1984 and we had given a loan of Rs. 4,55,000 on 1-12-1984 to the following parties at Hyderabad: Amount Rs. 1.Ms. Kavita Jalan 50,000 2.Mr. O.P. Jalan 3,50,000 3.Mrs. Sudha Jalan 34,000 4.Mr. Vikas Jalan 21,000 Total 4,55,000 Since we did not have any bank account at Hyderabad/Secunderabad, to avoid delay and to save bank charges, we had advised Deccan Polymers Limite....
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....nly on March 31, 1989, that is, after this petition was filed. Thus, in essence, Deccan Polymers transferred the machinery to the first respondent-company for Rs. 4,55,000 and, at the same time, gave a loan of Rs. 4,55,000 to respondents Nos. 3 to 6 and paid another sum of Rs. 45,000 to the third respondent. This sum of Rs. 5 lakhs was transferred to Poddar Projects on December 1, 1984. Thus, the amount transferred by Deccan Polymers to the account of respondents Nos. 3 to 6 is the real source of funds for the additional issue and this has again been shown as loan by Deccan Polymers to R.M. Trading Corporation, Madras. The criticism of counsel for the ninth respondent that all these are mere book entries and, in fact, no transfer of cash was involved cannot be brushed aside. Prima facie, there was an entry for transfer of some machinery from the sister concern under the same management, that is, Deccan Polymers, to the first respondent-company. The credit facility provided by Poddar Projects for a period of less than a week without interest and that too about the time of the resolution of the board, exhibit ZB-1 and transfer of funds by Deccan Polymers to respondents Nos. 3 to 6 o....
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....or in newly acquiring it, does not amount to an abuse of their fiduciary power. What is considered objectionable is the use of such powers merely for an extraneous purpose like maintenance or acquisition of control over the affairs of the company." On the basis of the material and circumstances in the case referred to earlier, I am of the opinion that prima facie a case has been made out that (a) respondents Nos. 3 and 4 have abused the fiduciary powers as directors in gaining control of the company and the affairs of the company are being conducted in a manner oppressive to the shareholders like the petitioners, the ninth respondent and their associates; and (b) the change in the pattern of shareholding and the subsequent changes in the board of directors will prejudicially affect the interests of these shareholders. During the hearing, counsel for the contesting parties offered to purchase the shareholding of the other but, there was no meeting ground, either on the price or on the modalities for purchase. The factory of the company is said to be in production and the company is having profits from the foreign joint venture company. At this stage, it will not be appropriate to ....